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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.

“These are high-risk, high-return players,” Fasulo says. “Many of them saw that their peers had invested in CRE earlier in the cycle and made tremendous returns. So everyone wanted in on the party. It’s the hedge funds that had huge positions built up when the music stopped that are really in serious trouble.”

With that said, Fasulo points out that “it’s easy to single out one particular capital sector as someone who acted irresponsibly. But there’s a lot of blame to go around, and everybody’s hurting right now. I wouldn’t be surprised if relatively speaking, real estate still looks pretty good on the hedge funds’ portfolios.”

Ironically, the down market will pose investment opportunities for hedge funds–if they’re in good enough shape to take advantage of these prospects. “It’s going to be a firm-by-firm situation,” Fasulo says. “It will all depend on how much time they need to spend looking backward and plugging holes in their portfolios as opposed to moving forward and taking advantage of all the opportunity that’s going to be there next year.”

And it’s as a result of the downturn in the market that these opportunities will emerge. “For the players that can go in and buy some of these distressed assets on the cheap, if we were to look back 10 years from now, we would see that 2009 and 2010 were two of the best years to buy properties,” says Fasulo.

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