Brazil Bet Burned Fortress

Michael Novogratz recently decided to leave Fortress Investment Group LP after the hedge fund he ran suffered heavy losses. ENLARGE
Michael Novogratz recently decided to leave Fortress Investment Group LP after the hedge fund he ran suffered heavy losses. Photo: Rick Wilking/Reuters

The smart money is having a hard time navigating global markets.

Michael Novogratz, one of Wall Street’s most famous investors, recently decided to leave Fortress Investment Group LP and close his macro hedge fund after it lost about $ 100 million over the past two months from investments in Brazil, according to people familiar with the matter. Earlier this year, the fund lost $ 150 million in a single day from wagers placed by a different Fortress trader against the Swiss franc, the people said. The latest losses left the fund down 17.5% for the year through September, according to a regulatory filing.

The gaffes at Fortress highlight the deep challenges some big-name hedge funds are facing. In recent years, many hedge funds blamed their poor performance on unusually placid global markets. But the long-awaited arrival of volatility hasn’t paid off as some firms that bet on global economic trends seem to be struggling to profit from recent swings in the U.S., China and elsewhere.

The flagship funds of Moore Capital Management LP and Brevan Howard Asset Management LLP were up 1.8% and roughly flat for the year through September, respectively, according to people familiar with the matter.

Macro funds on average have lost 0.6% this year through September, according to research firm HFR. Other types of funds that have made large bets on individual companies have fared even worse.

Widely held stocks including Valeant Pharmaceuticals International Inc. VRX 5.15 % and SunEdison Co. SUNE -2.91 % have plunged in recent months, contributing to steep losses for some of the industry’s biggest names. William Ackman’s Pershing Square Capital Management LP, a big Valeant holder, dropped 12.5% in September alone. David Einhorn’s Greenlight Capital Inc. is down 17% for the year through September, hit by losses on SunEdison, whose stock has declined 61% since August.

Overall, hedge funds are down an average 1.4% in 2015, through September. That beats the 5.3% total loss by the S&P 500 in that time frame, but is worse than the 1.1% total return of the Barclays U.S. Aggregate Bond Index.

At Fortress, Mr. Novogratz managed about $ 2 billion of investments, including about $ 1 billion in the macro fund. Earlier this year, the fund suffered steep losses on a bearish position on the Swiss franc after the Swiss central bank ended the currency’s peg to the euro. That trade had been led by Jeff Feig, then co-chief investment officer of the macro group with Mr. Novogratz.

When Mr. Novogratz assumed full control of the macro fund in July, he and other Fortress executives were confident he could engineer a recovery from year-to-date losses of 10% at that point, including the Swiss positions and a number of other losers.

Instead, Mr. Novogratz compounded the losses with mistakes in Brazil that brought his tenure at Fortress to an end.

Mr. Novogratz placed an outsize bet that Brazilian rates would fall as the nation’s central bank moved to aid the struggling economy. But in late September, investors—concerned that the Brazilian central bank might be forced to raise rates again to defend the weakening Brazilian real—pushed yields on Brazilian debt higher, hurting the Fortress fund.

On Sept. 23, the yield on 10-year Brazilian local debt soared by 0.65 percentage points to 16.88%, according to FactSet, a huge move for that market. Yields on futures also jumped. That day alone cost Fortress about $ 12 million, according to an investor.

Mr. Novogratz has a history of investing in Brazil and investments focused on the nation have long been a big piece of the fund, according to people familiar with the matter. He has visited the country a few times a year, was in Brazil for the most recent World Cup and last year made a high-profile speech predicting “major rallies” for Brazilian investments.

Some of the past bets worked out, but his track record in the country was mixed. In 2014, for example, the fund incorrectly bet that Brazilian President Dilma Rousseff would lose her re-election bid and that investments in the country would climb. That hasn’t happened.

Though traders say some of Mr. Novogratz’s moves may pay off long-term, in the hedge-fund world investors often don’t have patience for investment volatility or steep short-term losses. And the Fortress fund also suffered recently from falling Chinese markets, among other areas. It lost 4.7% in September and 4.4% in August.

Over the past 10 days, Mr. Novogratz realized his fund would soon face client redemptions and decided to pull the plug on the fund, according to a person familiar the matter. Other Fortress executives agreed with the decision.

“This was a difficult decision given my confidence in both the research positions we hold and the talent of our team,” Mr. Novogratz said in a statement earlier this week through Fortress about his fund’s closure. “But we have had an extremely challenging two years, and I do not believe the current environment is conducive to achieving our best results.”

The Fortress fund, which managed more than $ 8 billion at its peak in 2007, is expected to close before the end of the year.

Write to Gregory Zuckerman at [email protected] and Juliet Chung at [email protected]


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