Money Flows: Fortress Surprises

Chidem Kurdas

First quarter net capital inflow to hedge funds was positive but small—$2 billion according to Credit Suisse Tremont Hedge Index data, out of total industry assets of around $1.5 trillion.

With that number in mind, it is impressive that Fortress Group raised over $1 billion (gross) for its various funds during the quarter. At the same time, however, the assets of the firm’ global macro funds decreased, albeit slightly from $3.4 billion to $3.3 billion.

I would not have expected that in conjunction with a big inflow. At the start of 2009, the macro funds had $6.1 billion.

At a conference call Fortress executives said 70% of the new capital came into liquid-strategy hedge funds, 30% into illiquid strategies that include private equity. The macro funds took in a big chunk. Their assets went down, however, because of a large distribution ($510 million) from the special purpose vehicles created in the financial crisis to hold investments deemed illiquid at the time.

Clients could not redeem from the SPVs, of course, which did not please some. In the past quarter, in addition to the distributions, investors took out $210 million from the macro funds. With the SPVs winding down, this large drain on assets will end. Still, the managers’ decision to suspend redemptions in 2008-2009, though common at the time, is a competitive disadvantage now.

This effect may fade as investors move to less liquid strategies, in particular in credit, where Fortress is a big player. The executives sounded optimistic about future capital raising, in particular in China and the Middle East, a diversification from an investor base located mostly in the US and Europe.

Investors’ increased preference for large managers benefits the firm, where total assets rose  to 41.6 billion largely because of the acquisition of bond manager Logan Circle Partners.

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