Fortress to shut down flagship macro hedge fund

Years of poor performance and dwindling assets within Fortress’s macro business have prompted the firm to exit the strategy, with Michael Novogratz set to leave. Fortress’ credit business, on the other hand, is a growing and successful strategy for the firm.  

Fortress Investment Group, the US alternative investment firm, announced it is shuttering its flagship macro hedge fund after two years of poor performance and decreasing assets. The fund lost 17.5 percent this year through September. Assets have dwindled to $1.6 billion from $8 billion in 2002, according to The Wall Street Journal. Fortress confirmed the move in an announcement today and said that Michael Novogratz, who heads up the macro funds as their founder and chief investment officer, will retire from the firm at year-end

Novogratz and other Fortress executives have discussed the hedge fund problems on previous earnings calls. They were originally trying to boost performance and reign in losses by cutting staff, but ultimately decided to close the business entirely.

The firm’s macro hedge funds and flagship credit funds, led by Peter Briger, have long been the two main pillars at the alternative investment firm. But while the macro strategy floundered, the credit business has been doing well in terms of performance and asset gathering. Fortress Credit Opportunities (FCO) I, II and III posted net IRRs of 25.1 percent, 17.7 percent and 12 percent, respectively, from their inception dates through 30 June. The firm also reported in its second quarter results that it raised $700 million in its credit funds in the quarter. It closed its second real estate debt fund at $1 billion in June.

The macro hedge funds launched in 2002 to bet on global macroeconomic themes via equity, debt, commodity and currency instruments. Performance was hit by a bad bet on Brazil and poor currency trades, investors have said. The fund lost 1.6 percent last year, while the average macro hedge fund was up 5.6 percent, according to Hedge Fund Research.

In conjunction with the announcement, Fortress will redeem all of Novogratz’ operating group units, representing beneficial ownership of approximately 56.8 million class A or equivalent shares as of 30 September. The company will repurchase his ownership interests at a price of $4.50, which is equivalent to a 17 percent discount to the closing price of Fortress Class A shares on 12 October. The buyback will cut Fortress’ dividend-paying share count by about 13 percent. Fortress plans to fund the transaction through a combination of available cash and a note issued to Novogratz.

“We are obviously disappointed in this outcome, and we are grateful for Mike’s many contributions to Fortress over the years,” said co-chairmen Briger and Wesley Edens, and chief executive Randal Nardone, in a joint statement. “While we regret closing a fund that has been productive in the past, we also recognize the market’s reluctance to ascribe value to this strategy even in its best years.”

“Looking ahead, all meaningful drivers of business and earnings growth remain in place, embedded value on our balance sheet and in our funds is enormous relative to our market cap, and approximately 90 percent of our alternative capital will now reside in long-term or unlimited duration structures,” the executives continued.

The New York-headquartered firm has about $72 billion in assets under management overall across private equity, credit, hedge funds and traditional asset management. It went public on the New York Stock Exchange in 2011. The stock peaked at $8.57 per share in August this year. The shares have been trading at around $5-$6 recently. They dropped to about $5.07 following the news reports yesterday and later jumped to $5.75 today, following Fortress’ own announcement (13 October).

This story was updated with the details of the redemption of Novogratz’ ownership stake on 13 October.