Controversially ousted as head of Fannie Mae in September 2008, Daniel Mudd joined Fortress Investment Group, where he had been a director since 2007, as CEO last summer. His injunction from Fortress’s co-founders: Build up the established alternative investment house’s business.
Mudd quickly made the rounds of Fortress’s clients and other investors, but his visits were not mere courtesy calls. He was aiming to find out what they expected from an asset manager. After all, the collapse of the stock and bond markets had shattered investors’ confidence in the conventional wisdom about asset allocation, volatility, diversification and risk.
“I did a couple of laps around the globe talking to investors,” recalls Mudd, 51. “I expected to get a clear sense of how investors were looking at the world and where things go from here, post-2008. But I wasn’t able — for the first time in my career — to take a view and set a strategy.” So, he decided that Fortress should do the only sensible thing: a little bit of everything.
On his tour, Mudd discovered that many investors remain more than a little risk-averse, even as their liabilities grow. Some want to commit more to alternative investments — hedge funds as a group were down only half as much as the equity markets in 2008 — but others want to go in the opposite direction, shunning secretive private investments that suffered liquidity woes during the credit crisis and emphasizing more-transparent traditional portfolios.
Fortress’s limited diversification helped in the crisis. The New York–based firm’s credit funds, hedge funds and private equity business all suffered, but not at the same time or to the same extent. Now hedge funds are reviving even as private equity remains sluggish.
Mudd concluded that Fortress, public since 2007 and with almost $32 billion in assets, should diversify further. So he committed the firm to expanding its product range and the scope of its market coverage. “That nonconclusion was a conclusion,” he says of his frustrating talks with investors to divine the future of investing.
Mudd says Fortress’s strategy is focused on “higher intellectual content providers.” As he explains it, “Alternatives are our roots, so it wouldn’t make sense to go into retail, high net worth or indexing.”
Fortress made its first foray into conventional asset management earlier this year when it purchased, for $21 million (plus a potential earn-out), institutional fixed-income manager Logan Circle Partners from Guggenheim Partners. Philadelphia-based Logan, whose performance lagged badly in 2008 but rebounded in 2009, is an active manager of core, high-yield and municipal fixed-income securities. Fortress would like to turn Logan’s $12 billion in assets (down from $15 billion precrash) into $40 billion by introducing it to Fortress’s own clients and offering guidance on strategy.
Fortress is hardly the first firm dedicated to hedge funds, private equity and other exotic alternatives to discern opportunity in the comparatively staid world of traditional investing. Ten years ago New York–based quantitative hedge fund firm D.E. Shaw started a traditional business, and it now accounts for $4 billion of the firm’s $22 billion in assets. AQR Capital Management, a Greenwich, Connecticut–based quant firm, recently launched mutual funds for retail investors. And Highbridge Capital Management, a hedge fund firm that is now part of J.P. Morgan Asset Management, also offers mutual funds using arcane strategies, such as statistical arbitrage, developed for its hedge fund clients.
Some investors are skeptical of cross-investing firms that try to do it all. Timothy Barrett, CIO of California’s San Bernardino County Employees’ Retirement Association, says, “I understand why managers want to do it from a business perspective, but it’s difficult to be good at all things.”
Mudd would agree. He doesn’t want Fortress to succumb to the supermarket syndrome by making dozens of smaller purchases. “I’m agnostic as to whether we build out our incremental earnings stream by doing transactions like Logan or build it ourselves,” he says.
