Fortress Investment Group LLC AFIG

Morningstar Rating

Stock Research and Analysis

by Greggory Warren, CFA

Despite recent improvements in the equity and credit markets, Fortress continues to face redemptions from its hedge funds and has had a difficult time monetizing investments from its private-equity operations. With assets under management (AUM) almost Read more

Bulls Say

Fortress still boasts a strong performance record, despite the impact the collapse of the credit and equity markets had on its AUM, which should allow the firm to attract new investors once risk appetites return to more normal levels.

Even with the bear market, Fortress' AUM has grown rapidly from $11.3 billion at the end of 2005 to $29.5 billion at the end of last year, a 38% compound annual growth rate.

Solid performance from its hedge funds spurred more than $3 billion of inflows into Fortress' hybrid hedge funds during the second quarter, more than offsetting $1 billion in redemptions and capital distributions during the period.

Many of the investments managed by Fortress are subject to lock-in periods or other restrictions that stabilize the level of management fee income the firm receives. In its private-equity funds, management fees are determined by initial investment rather than net asset value, limiting the revenue loss caused by market downturns. Read more

Bears Say

While Fortress' AUM fell just 11% last year, it was due to the fact that the firm suspended redemptions on some of its funds. Although the stigma surrounding such suspensions may have been lessened by the fact that many alternative investment managers employed the same tactic, it runs the risk of alienating existing clients and scaring off future investors.

Despite the ongoing improvement in the performance of its funds, Fortress has had a difficult time raising capital of late, bringing in only $630 million in new cash during the third quarter versus $3.4 billion during the preceding period.

Given the poor absolute performance of many hedge funds during the bear market, large institutional investors have challenged the fee structure, and in some cases hedge funds have lowered fees in an attempt to keep investors from pulling money out of their funds.

For the fifth straight quarter in a row, Fortress announced that it would not pay a dividend at the end of the third quarter as it conserves cash for investments and working-capital needs. Read more

Strategy

Fortress seeks to increase the level of assets under management by using its recognizable brand and deal-making reputation to raise capital. The firm is also looking at geographic expansion; the principals Read more

Management

Daniel Mudd became CEO of Fortress in August 2009, allowing Wesley Edens, a cofounder and chairman and CEO since the firm went public in February 2007, to focus more on running Fortress' investment portfolios than managing its operations. Mudd had been Read more

Profile

Fortress Investment Group runs private-equity and hedge funds for wealthy individuals and institutional investors. The private-equity funds are focused on control-oriented Read more

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