Hedge Fund Hell: Fortress Under Siege

However, in a year that saw some of the mightiest financial stocks crumble to a fraction of their value, or become worthless, it's tough to imagine a good short-term outlook for Fortress. Investors once burned by keeping the faith in firms like Bear Stearns, Lehman Brothers, AIG (AIG Quote), Freddie Mac (FRE Quote) and Fannie Mae (FNM Quote), only to watch stock prices plummet and never return, may be twice warned -- particularly if Fortress's year-end report is bleak.

"If you had asked me 12 months ago, would I think that General Motors (GM Quote) is going to go down to $2, $3 a share? And I would say no," says Newman. "Would Fortress go down to $1.25 a share? I would say no. Some of these are going to be great investments that turn around to $20 a share next year, but others are going to go under and I think it's a fool's game to figure out which one is which."

Another fund manager says he would be more of a buyer than a seller, because those leading Fortress are "very, very bright people" and "it's very possible that they could come back and live another day."

There are unsubstantiated whispers that Fortress' principals may just take the firm private, with a market cap hovering around a mere $120 million. Such a move would allow Fortress to take advantage of attractive opportunities without the added scrutiny of regulators and public investors, thus limiting its vulnerability to bear-market reputation risk. Such an outcome -- while always possible -- is still just speculation today, but the rumors helped spur a rally in Fortress' stock on Monday, driving shares up nearly 50% to $1.90.

Morningstar analyst Alan Rambaldini warns that lower fees, weak performance, difficulty raising capital and tough credit conditions will hamper Fortress' returns for the near term. He notes that redemptions could force Fortress to wind down, leaving shareholders in the lurch, but bets that the company's track record and strong management will allow it to weather the economic storm.

His outlook, however, provides little solace for investors who watched Fortress shares plummet in value, or clients whose funds are now locked up after watching returns slip into the red.

"Although we think Fortress will ultimately come through all right on the other side, it's unlikely to repeat its former success," Rambaldini said in a recent note, "and the near term could be a wild ride."