Hedge Fund Hell: Fortress Under Siege

If Fortress is unsuccessful in doing so, it could impact the companies in which it holds a stake. Ironically, companies whose stocks have performed the best may suffer the most, if Fortress is forced to liquidate holdings to return cash to clients. Top holdings include Caterpillar (CAT Quote), General Electric (GE Quote), Goldman Sachs (GS Quote), Nike (NKE Quote) and Blackberry-maker Research in Motion (RIMM Quote), according to Fortress' most recent filing on Sept. 30 about holdings in its various funds.

Goldman Sachs analyst Marc Irizarry believes that Fortress will have to reduce or waive management fees in light of weak performance and accelerating outflows. Eric Newman, a co-portfolio manager at the advisory firm TFS Capital, which operates two hedge funds and two mutual funds, believes that transparency will also be key, as Fortress works to maintain its reputation with clients and investors.

"Managers don't have a free pass anymore to say 'Trust me,'" says Newman. "Saying, 'We know better than you what to do with your money,' then halting redemptions as performance suffers, is not going to fly anymore."

Window of Opportunity

Whatever Fortress does to rebuild confidence, it is presently seated in a window of opportunity, with much of its debt pushed back to a later date, and a bullish sentiment from top investors like Nomura (NMR Quote), Fidelity, Oppenheimer, Bank of America (BAC Quote) and Legg Mason (LM Quote), which all recently increased their holdings.

There are also fewer investors betting against Fortress, with short interest shrinking to around 5%, vs. a height above 10% in late September. The Street seems to be arguing that Fortress is a bargain. Analysts are targeting exponential increases to its value over the next 12 months -- with one believing it could sextuple, and just one recommending that clients sell the stock.