August 1, 2013 / 4:32 PM / 4 years ago

Fortress profit soars in second quarter as its funds perform

NEW YORK (Reuters) - Fortress Investment Group (FIG.N) on Thursday reported its profit almost tripled in the second quarter as double-digit returns in its hedge funds and a solid performance in its credit funds led to higher incentive income.

New York-based Fortress, one of a handful of publicly traded alternative asset managers, reported pre-tax distributable earnings climbed 196 percent to $148 million, or 30 cents per share, from $50 million, or 9 cents per share, a year earlier.

It was the strongest quarter of distributable earnings since Fortress's first quarter as a public company, a spokesman said.

Pre-tax distributable income is the company's preferred way to measure performance because it excludes large quarterly compensation costs stemming from the equity interest of principals who took the company public in 2007.

Fortress said had a net loss attributable to Class A shareholders of $2 million, compared with a year-earlier profit of $5 million. The decline was mainly driven by higher compensation and benefits costs. Assets under management fell 2 percent to $54.6 billion at the end of the second quarter.

Fortress executives on a conference call focused on the 323 percent spike in incentive income - the fees that fund managers earn on top of management fees if their portfolios perform well. Incentive income hit $199 million compared with $47 million a year ago.

Among the firm's hedge funds, the flagship Fortress Macro Fund rose 9.1 percent in the quarter, while the Fortress Asia Macro Fund climbed 9.8 percent, pushing yearly returns for both portfolios into double digits.

Hedge funds, on average, lost money in the second quarter, according to eVestment.

Fortress's hedge funds attracted $1.4 billion in new capital in the first half of the year, with roughly half of that coming in the second quarter.

For July, investors have pumped another $470 million into Fortress hedge funds.

"Redemptions are down and investor demand is up," Chief Executive Randal Nardone said.

Nardone took over as CEO in the second quarter, after handling the CEO duties on an interim basis since 2011, when Daniel Mudd resigned as CEO amid regulatory troubles stemming from his time at the helm of Fannie Mae.

The Drawbridge Special Opportunities fund, a credit hedge fund, rose 5.2 percent in the three months through June.

"Financial institutions are deleveraging, and there are a whole host of opportunities for us to make loans in places that bigger financial institutions don't want to be," said Peter Briger, co-chief investment officer of the credit business. But he said the overall credit investing environment remained unappealing.

"Our best shot for things to get better on the investment side is certainly in Europe, where the economies continue to get worse outside of Germany," Briger said. "We're going to be better in an environment where risk premiums are high and actual risk is lower, and I don't see that in the foreseeable future."

Fortress shares rose 1.15 percent to $7.94 in midday trading.

Reporting By Katya Wachtel; editing by Sofina Mirza-Reid, Nick Zieminski and Leslie Adler

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