Who’s Been the Best Performing Fund of the Third Quarter?

FORTRESS INVESTMENT GROUPFortress Investment Group is the top-performing fund of the third quarter of the over 400 funds and investors we track, seeing a return of almost 44% during 3Q. We have calculated the value-weighted returns for 400 hedge funds in the 1500 largest stocks and complied a list of the top performing funds for the first three quarters of 2012. The returns are based on the fund’s 13F long positions only, as we do not have access to their short positions.

Fortress started out as a private-equity firm in 1998, being founded by former BlackRock Financial partner—Wesley Edens, UBS managing director—Robert Kauffman, and another UBS managing director—Randal Nardone. The former private equity focused investment firm entered the hedge fund industry in 2010 by bringing in former Goldman Sachs partners Michael Novogratz and Pete Briger to launch the Fortress hedge funds.

Fortress’ top investment according its 2Q 13F was Nationstar Mortgage Holdings Inc (NYSE:NSM). Nationstar is the non-bank residential mortgage servicer that offers a range of services across residential mortgages. Nationstar is the pride and joy of Fortress, who had over 45% of its 2Q 13F portfolio invested in the company. Nationstar was up almost 55% for 3Q and Fortress owned 67.5 million shares at the end of June. Assuming Fortress owned the same number of shares throughout 3Q, Fortress made over $783 million on this holding alone. Nationstar has been soaring as housing begins to see a turnaround.

Nationstar was recently announced as the winning bidder for the bankrupt Residential Capital, a former unit of Ally Financial. Credit Suisse recently placed an upside price target of $36 if Nationstar won the bid for Residential and a $24 price target if it did not. No other fund manager owned near the number of shares as Fortress at the end of 2Q, yet a few other top funds did manage to benefit from Nationstar’s 3Q success, including John Osterweis and Israel Englander, with 2 million and 1 million shares, respectively.

Rounding out Fortress’ top five picks of its 2Q 13F are RailAmerica, Inc. (NYSE:RA), Brookdale Senior Living, Inc. (NYSE:BKD), America Capital Ltd. (NASDAQ:ACAS), and Seacube Container Leasing Ltd (NYSE:BOX). Fortress owned more shares than any other fund in each of its top five 2Q holdings and has concentrated portfolio with nearly 80% of the firm’s 13F invested in these five holdings.

RailAmerica was up over 15% for the third quarter based on a buyout of the company for $27.50 per share by Genesee & Wyoming. The short line and regional freight rail operator continues to post solid shipment numbers as the deal is being closed. September carloads were up 2.4% from the same month a year ago, on the back of a 2.9% increase in August and 5.4% in July. Again, Fortress had a heavy concentration in RailAmerica, over 23% of its 2Q 13F, allowing the company to make serious money on the RailAmerica’s buyout.

Brookdale, up 30% during the third quarter, is an operator of senior living communities throughout the United States. The company has seen interest from other fund managers, Carlson Capital and JAT Capital as investors gear up for an aging population boom. This overwhelming certainty that our population will get older and indeed need some degree of assisted living has continued to boost the company’s stock price despite missing EPS estimates for the last four quarters. Deutsche Bank recently assumed coverage of the company, placing a $33 price target on the company, versus its current stock price of $23.50.

American Capital is an equity firm and global asset manager. Up almost 13% in the third quarter, Fortress was not the only fund to enjoy the upside, where Luxor Capital also had a massive stake. After a rough 2008, the company suspended its dividend in 2009. However, the company has crushed earnings for the last three quarters and trades at a P/B of 0.9, compared to peers Ares Capital and KKR, 3.0 and 2.6, respectively.

SeaCube is a container leasing company, engaged in the acquisition, leasing and sale of refrigerated and dry containers and generator sets. While SeaCube was up only 10% during 3Q, the company pays a 6.3% dividend yield, with only a 47% payout ratio. Fortress was the only major fund that showed major interest in SeaCube for 2Q, although Chuck Royce, Israel Englander and D.E. Shaw all held modest positions. The company is a micro-cap stock with a sub $500 million market cap, but operates internationally as one of the largest container leasing companies. Despite weakness in both Europe and Asia for other industrial companies, SeaCube has seen increases in these segments on shipment volume and is expected to grow full year EPS by over 20%.

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