Earlier this month, Fortress Investment Group LLC (NYSE:FIG) reported Q1 EPS of $ 0.01 versus the consensus estimate of $0.15, and revenue of $310 million that beat estimates by $81.72 million.

Assets under management were at an all-time high of $62.5 billion as of March 31, 2014, and uncalled capital (“dry powder”) amounted to $ 6.6 billion as on that date as per the company’s press release.

“We had a solid start to the year, with our highest first quarter of distributable earnings per share since 2007,” said Chief Executive Officer Randy Nardone.

Liquid markets disappointed in Q1

However, the company’s macro funds business was on the back foot and Nardone had this to say on the earnings conference call:

“In liquid markets, our main focus is on generating a solid full year performance for LPs and turning incentive income back on. Obviously, we’re disappointed with our 2014 results to date. Fortress Macro down about 6% net and Asia Macro down about 5% net through last Friday. We have 8 months left to the year though, and a hole to fill. We think we’ll fill it. The guys have had down quarters before and have rebounded smartly.”

Q2 off to an inauspicious start

RBC Capital Markets analyst, Bulent Ozcan, in his research note on Fortress Investment Group LLC (NYSE:FIG) is concerned that the liquid hedge funds business is not showing progress, though the credit funds are generating impressive returns.

“Liquid Hedge Funds had commenced the year with a rocky start and we’re not seeing any improvement in the month of April,” he says. “It seems as if the current operating environment does not provide a fostering environment for macro funds.”

The underperformance from the liquid hedge funds is likely to take a toll on the overall earnings of the company; it would have to count on earnings from other businesses (and its balance sheet) to make up for the likely shortfall in performance fees from the liquid hedge funds business, feels Ozcan.

Flagship funds in the red

Fortress Investment Group LLC (NYSE:FIG)’ leading Macro Fund was down 86 bps during April, and year to date, investors are staring at a negative return of 6.34%.

The Asia Macro Fund was similarly off by 185 bps and down by 5.38% year-to-date.

Other funds such as the Convex Asia Fund and the Fortress Partners Fund lost 57 bps and 96 bps respectively.

Fortress Macro Funds investment approach

The Fortress Macro Funds invest in global fixed income, commodities, currency and equity markets, and their related derivatives, through a macroeconomic investment approach and seek to capitalize on the imbalances in financial markets that are influenced by economic, geo-political and capital flow factors, says the Fortress website.

View from the top

Michael Novogratz, principal and member of the board of directors of Fortress Investment Group LLC (NYSE:FIG) and Co-Chief Investment Officer of the Fortress Macro Fund and the Drawbridge Global Macro Fund, admitted at the recently held Ira Sohn Conference that global macro funds were having a rough time of it in recent times.

“It’s been a miserable four months for most macro funds, including my own,” he said.

He cited an eerie calm in the markets, as well as their low volatility (“generational lows”) and an absence of investable and great themes as the factors contributing to a challenging environment for macro traders.

Brazil may be a ‘theme’ however

Novogratz made a short but impressive presentation on why Brazil is an interesting (though contrarian) investment destination as of now – a “simple, actual idea that you can make a whole lot of money on,” in his words.

An “all-time high” and all-pervasive pessimism surrounding Brazil, both domestically and across the globe, makes the case for a compelling contrarian opportunity laced with value.

“It’s so bad that it’s good right now,” he said in a widely quoted remark.

According to Novogratz, a key factor in the bullish case for Brazil is the likelihood that incumbent President Dilma Rousseff will lose in the elections this year. That could spark off a major rally in Brazilian assets, especially equities; “The bet is a really simple one,” he says. “The election dynamic is going to shift between now and the election and the probability of Dilma winning will go lower.”

Speaking later to Bloomberg, Novogratz said, “It’s tough to be a president in a developing country like Brazil that’s had a history of hyperinflation when you can’t get inflation under control.”

“The spike in inflation will make her popularity go even lower. My guess is it’s so bad that you’re going to see regime change,” he added.

Other Brazilian ‘doom and gloom’ indicators

In a well compiled and concise presentation at the Conference, Novogratz showed how almost all macroeconomic indicators were despondent or headed downhill, but in the aggregate made up the case that the worst was probably over for Brazil.

Here are some of those slides that show all the bad news that may already have been captured in the price.

Plunging consumer confidence:

1-consumer-confidence Fortress

Business confidence is even worse:

2-business-confidence

Unit labour costs soaring higher:

3-labour costs

…And galloping government expenditure:

4-government-expenditure

Stubborn inflation:

5-inflation

Dilma’s falling popularity:

6-dilma

…And crashing Brazilian stocks:

7-stocks