Fortress Investment's Incentive Income Drops

Fortress Investment Group LLC said first-quarter profit increased due to a one-time asset transfer, while incentive income halved and management fees fell.

Results missed analysts' expectations. Shares in the company fell 0.6% in recent trading, erasing most of the year-to-date gain notched through Wednesday's close.

The New York-based asset manager is known for distressed lending and runs funds that bet on global financial and economic trends. Fortress operates in four business units--private equity, credit, liquid markets and its traditional asset management business Logan Circle Partners--and had $69.9 billion in assets under management as of March 31, up 3% since the end of December.

Hedge funds had a strong start to the year, rising 2.1% on average during the first quarter, but several factors upended winning bets beginning in late March: the dollar reversed course against the euro and other currencies as investors began to doubt the Fed would raise rates this summer, oil bounced, and growing concerns over a Greek default shot German bond yields higher.

Fortress's Macro Fund, meanwhile, has been rocked by a series of bad bets since last year. In February, the company disclosed nearly $800 million in redemptions from its flagship hedge fund. The fund, managed by closely followed Michael Novogratz, had $3.2 billion is assets under management at the start of the year.

Net returns for the Macro fund fell 4.7% in the first quarter and are down 8% this year, following a 1.6% loss in 2014, the company said Thursday.

"Subsequent to quarter end, the Macro Fund continues to face headwinds," analysts at Jefferies wrote in a note.

In all for the three months ended March 31, Fortress reported a profit of $87 million, or 15 cents a share, up from $9 million, or a penny a share, a year earlier. The company said the increase was mainly due to a $198 million increase in other income on account of a transfer of its interest in Graticule Asset Management. A $98 million increase in expenses partially offset that gain.

Pretax distributable earnings fell to $55 million, or 12 cents a share, from $97 million, of 21 cents, in last year's first quarter.

Revenue declined 4.2% to $227 million.

Analysts projected 18 cents in earnings per share and $255 million in revenue.

Management fees fell 5.4% $139 million, lighter than what some analysts expected, primarily due to lower fees from liquid hedge funds and private-equity funds, the company said. The transition of the firm's Asia macro funds to Graticule Asset Management drove a $9 million reduction in top-line management fees, according to Jefferies.

Incentive income more than halved from a year earlier and totaled $51 million. Fortress pointed to lower incentive income from credit private-equity funds and credit hedge funds as the culprit. The decline was a surprise to some analysts.

"We had a very active start to the year," said Chief Executive Randy Nardone. "With $1.2 billion of gross embedded incentive income not yet recognized in earnings and nearly $11 billion of dry powder for us to put to work, we see great prospects for growth and value creation."

Dry powder refers to money raised but not yet invested, and it isn't included in the firm's assets under management tally. Fortress said about 70% of dry powder at the end of March was available for general investment purposes.

Write to Lisa Beilfuss at [e-mail]

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