Hedge Fund Hell: Fortress Under Siege

Some investors who paid $30 per share for Fortress Investment Group (FIG) in early 2007 might be asking the following as its stock hovers near $1 today: Why didn't anyone ever advise me to sell?

Like other alternative-investment firms, Fortress faces incredible difficulty raising new capital as asset values have declined, returns have become more meager and investors are clinging to cash for dear life. A tidal wave of redemptions from existing clients forced Fortress to halt further investor withdrawals from its Drawbridge Global Macro Fund in December, about a month after the firm posted a third-quarter loss that fell far below Wall Street's profit expectation.

Fortress' liquid hedge-fund segment -- which includes Drawbridge Global Macro and Fortress Commodities Funds -- accounts for $9.1 billion worth of capital, and clients can ask for their money back at the end of every quarter. The most recent available figures show that clients demanded $5.6 billion of their cash back in 2008.

Fortress' other hedge-fund business -- a hybrid one that includes Drawbridge Special Opportunities Funds and Fortress Partners Funds -- accounted for $8.2 billion worth of capital. Although those funds have more strings attached to redemptions, clients still asked to withdraw $2.3 billion last year.

Jeffries & Co. analyst Daniel T. Fannon estimates that when all is said and done, assets under management in Fortress' hedge-fund group will fall by nearly 40% to $10.5 billion. As the hedge-fund world navigates through dire straits, Fortress' other business -- private-equity -- didn't lose any capital, but also has the luxury of long-term restrictions around its funds.