Fortress Investment Group LLC (FIG:US), the first publicly traded alternative-asset manager in the U.S., reported third-quarter profit that missed analysts’ estimates as hedge-fund returns slumped.
Pretax distributable earnings, which exclude some compensation costs and other items, increased 1.6 percent to $65 million, or 13 cents a share, from $64 million, or 12 cents, a year earlier, New York-based Fortress said today in a statement. Analysts expected per-share profit of 15 cents, according to the average of seven estimates (FIG:US) in a Bloomberg survey. The shares fell 4 percent in New York trading.
Fortress’s hedge-fund unit recorded a loss in the third quarter as returns slumped in strategies seeking to profit from macroeconomic events and those focused on investments in Asia. Fortress’s macro strategy, the biggest hedge fund run by the firm, lost 3 percent in the quarter, and its Asia macro fund declined 1.1 percent.
“We gave back some returns in the third quarter, which is never acceptable to a team focused on delivering strong and consistent absolute returns,” Michael Novogratz, co-chief investment officer of the macro funds, said in the statement. Novogratz said his funds have had a “good start” in October.
Fortress closed at $8.25 after its biggest percentage drop since Aug. 15. The stock, which has gained 88 percent this year, is down (FIG:US) 55 percent since the company’s February 2007 initial public offering, when it sold shares at $18.50 apiece to become the first U.S.-listed buyout and hedge-fund manager. Blackstone Group LP (BX:US), which followed four months later, still trades below its offering price.
Fortress’s liquid hedge-fund unit posted a pretax loss in distributable earnings of $11 million in the quarter, compared with a gain of $8 million a year earlier. Pretax distributable earnings in the private-equity unit rose to $30 million, up from $28 million a year earlier.
Macro hedge funds on average declined 6.6 percent in the third quarter, according to the Bloomberg Active Indices for Funds.
Fortress’s private-equity business benefited from a 10 percent appreciation in its portfolio in the quarter, compared with 5.9 percent at KKR & Co. and 4.2 percent at Blackstone. Fortress’s Nationstar Mortgage Holdings Inc. (NSM:US) gained 50 percent in the third quarter, and Springleaf Holdings Inc. went public on Oct. 15, valuing its $125 million original investment at $1.7 billion at yesterday’s closing price.
“Our financial services investments continue to be standouts,” Wes Edens, Fortress’s co-chairman, said in the statement. “We see further upside for these and other investments in our main funds.”
Fortress’s distributable earnings differ from U.S. generally accepted accounting principles. Under those rules, known as GAAP, the company’s net income attributable to Class A shareholders was $42 million, or 12 cents a share, compared with $1 million a year earlier.
Blackstone, the world’s biggest alternative-asset manager, earlier this month reported net income of $171 million for the third quarter, compared with $129 million a year earlier. KKR reported a third-quarter profit of $205 million, compared with $127 million a year earlier as appreciation in its portfolio holdings boosted unrealized gains and it collected more fees for completing deals. Both firms are based in New York.
Private-equity firms pool money from investors including pension plans and endowments with a mandate to buy companies within about five to six years, then sell them and return the funds with a profit after about 10 years. The firms, which use debt to finance the deals and amplify returns, typically charge an annual management fee equal to 1.5 percent to 2 percent of committed funds and keep 20 percent of profit from investments.
Fortress’s businesses include private equity, credit, liquid hedge funds and a traditional-asset management unit called Logan Circle Partners, the largest by assets under management. The firm’s total assets rose to $58 billion from $54.6 billion at the end of the second quarter.
Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.
Fortress said it will pay shareholders a dividend (FIG:US) of 6 cents a share on Nov. 15.
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