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Hedge Funds Clipped by Downturn

NEW YORK CITY-Fortress and other hedge funds with heavy CRE exposure may be challenged to meet next year's investment opportunities, says RCA's Fasulo.

By Paul Bubny | Updated on December 05, 2008

NEW YORK CITY-Reports that locally based Fortress Investment Group has suspended withdrawals from its Drawbridge Global Macro fund, and that its stock slid as a result, may say more about the tough sledding now faced by hedge funds with heavy exposure to risky CRE ventures than about the travails of any one company. While a Dec. 3 filing with the Securities and Exchange Commission indicated that Drawbridge Global went from $8 billion in assets under management to $3.7 billion in the space of two months, the HFRX Index for that date also showed that hedge funds globally have lost nearly 23% of their value since the beginning of 2008.

In many cases, the reversal of fortune suffered by individual funds dovetailed with their exposure to risky commercial real estate investment. “Hedge funds are momentum-driven, and many of them shifted gears to focus on real estate,” says Dan Fasulo, managing director with Real Capital Analytics. “Let’s face it–between 2005 and 2007, real estate was the flavor of the year.”

An article last week in the New York Times noted that “hedge funds and private equity, once lucrative businesses that helped define an era of unrivaled Wall Street wealth, have crumbled in the credit crisis.” Fasulo tells GlobeSt.com that the issue wasn’t ill-advised investment decisions. “But there’s no question that a lot of the deals and positions they took were on the risky side of the spectrum, and subsequently that has come back to bite them because of how quickly the market has changed.” As an example, he cites Fortress’ bridge loan to Macklowe Properties on its $7-billion acquisition of the Equity Office portfolio, an acquisition that ended in the piecemeal, discounted sale of that portfolio earlier this year.

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