Hedge Fund Hell: Fortress Under Siege

Fortress isn't alone in its struggle; the entire hedge-fund industry is shrinking as the recession has taken hold, asset values have declined and clients have demanded their money. Private-equity players are finding attractive investment opportunities, but lack the financing to get deals done.

Overall, Fortress showed relative strength as the bear market took shape, with its Drawbridge Global Macro fund down 13.5%, Drawbridge Special Ops fund down 5.7% and the Commodities fund up 7.2% through Nov. 30 -- better performance than the overall markets or many of its peers, according to a recent report by Fannon.

Banking on Strong Reputation

Fortress' reputation and relatively decent performance allowed the firm to raise $3.1 billion in new capital, net of redemptions requested, for the year ended Dec. 31. It was also able to refinance nearly all of the $7.2 billion worth of debt that was to mature in 2007 and 2008 at an average cost of 6.5% -- a phenomenal feat for an alternative-asset manager with a plummeting share price, in the midst of an unprecedented credit crisis.

Looking ahead, there are several factors that will determine Fortress' ability to survive. If the credit crisis calms down, Fortress' nearly $40 billion in outstanding debt may not overwhelm the firm in coming years. If investors' risk appetite returns, or Fortress proves its reputation is deserved, the company will find it easier to raise more capital. If liquidity is restored to the market, Fortress can make big bets and boost performance more easily as well.

But all of those are big "ifs." Fortress CEO Wes Edens highlighted "limited private equity realizations as well as zero or limited hedge fund profits" in coming quarters as key concerns for investors. The outlook has arguably worsened since that conference call on Nov. 13, and the firm will have to do something to entice new clients to place their funds with the firm and to keep existing investors happy while holding onto their cash.