Fortress Investment Group LLC (NYSE:FIG)’s hedge fund, Fortress Macro Fund, was down 2.57 percent in July and another -1.33 percent in August, trimming YTD return to 8.75 percent, according to a letter to shareholders reviewed by ValueWalk. Fortress Asia Macro Fund was down 0.6 percent in the last month, and the fund’s overall return is now +10.9 percent. These hedge funds are managed by Adam Levinson.


U.S. is on track as taper looms near

In the monthly letter for July, Fortress shares its outlook on different regions of the world. In the U.S., Fortress thinks that economic recovery is improving but it is unclear how markets will handle it when the fateful taper actually materializes. A fiscal drag in the second half of this year would be a given, and Levinson is not sure if the rally seen in global markets for the most part of last year would regain steam or fizzle out. In the assessment of Fortress, GDP estimates for H2 will be lowered, but other fundamentals are improving; housing is showing strength and consumer confidence is improving.

Fortress expects higher interest rates in the U.S.

Fortress expects higher interest rates in the U.S. and thinks these would remain cheaper in comparison to Europe. Fortress points out that Fed could either adjust targets of unemployment and inflation, or carry out informal discussions to contain market turmoil in the event of tapering. In both cases, the consequences of a change in fiscal policy will not just effect rates but also USD and equity markets.

Europe gradually advancing to positive growth territory

In Europe, Levinson expects authorities to remain supportive and cushion the process of recovery. The region could show positive growth towards the end of this year. However, it won’t be enough to produce material change in the unemployment rates across the euro zone. Levinson notes that the eurozone has continued to show strength despite troubles in Italian government, where the Prime Minister was convicted of tax fraud. There is also another challenge for eurozone ahead as Germany decides whether it will have a new chancellor or Angela Merkel will continue to hold office.

Japan’s consumption tax hike remains a crucial risk

In Asia, China’s CNY is expected to experience slow appreciation by Levinson, whereas India is gearing up to anchor the rupee as much as possible. Fortress expects the new Indian central bank governor will support INR with regulatory changes that improve inflows rather than by changing interest rates.

Japan, where the fund incurred its principal losses in long equity positions, remains one of the core positions of the Fortress Macro Fund. Levinson thinks that BoJ will reassess the future course of its easing program in late October. The next big decision that Japan will deliberate on is whether to double the consumption tax rate from 5 percent to 10 percent over the next two years or not. The tax hike would adversely affect the Japanese markets, however it would also prove that the Abe government is not scared of implementing tough structural reforms. Shinzo Abe is in a tough spot. Fortress’ expectation is that the tax hike will go as planned and be coupled with an added stimulus in the next year.