Recent movements within the hedge fund industry are sending mixed messages about the health of a financial sector that has been critical to the recent success of the Yale endowment.

Hedge funds on average have not been a better investment than the stock market for the past two years, Reuters reported on Tuesday. But Fortress Investment Group LLC, a major hedge fund and private equity management company that has invested some of Yale’s money, announced last Wednesday that it will be going public. The offer will make Fortress the first publicly-held alternative assets management company in the United States, a move that some Yale professors said may indicate that some hedge funds are still going strong. Professors and industry analysts said that despite waning profits for the industry at large, Yale should still expect to see good returns because of Chief Investment Officer David Swensen’s renowned expertise.

Hedge fund returns have been lagging nationwide over the last year, said Yale finance professor K. Geert Rouwenhorst, who also chairs the University’s Advisory Committee on Investor Responsibility. But Charles Davidson — a director at Standard & Poor’s, which tracks investment activity — said the funds have been making gains lately.

Endowment consultant Richard Anderson said that with so much money invested in hedge funds worldwide — about $1.5 trillion in 8,000 funds — some investors will have poor returns. But, he said, Yale should be able to pick strong fund managers, as it has in the past, even with the deteriorating climate.

“The biggest [university endowments] are the smartest,” Anderson said. “I’m pretty confident that they will make money.”

Hedge funds are pooled investments that profit from market inefficiencies and are only open to high-net worth individuals and institutions. Private equity, a class separate from hedge funds, includes the purchasing of entire companies and venture capital endeavors. When Fortress goes public, its stockholders will be investing in the management fees the company charges for running its hedge and private equity funds. Access to the funds themselves will remain private.

While there is no indication that Yale invests in Fortress’ hedge fund component specifically, it has invested in the group’s private equity arm. Both the Investments Office and Fortress declined to comment, but public minutes from the Oregon Investment Council indicate that as of March 23, 2005, Yale had invested in one of Fortress’s private equity funds. Ron Schmitz, director of investments for the Oregon State Treasury, said that as of March 2005, Yale invested in a Fortress fund that specializes in real estate deals.

Although Reuters reported that hedge funds have performed worse than the S&P 500 in the first 10 months of 2006, not every hedge fund may be falling behind. Rouwenhorst said companies normally only become public when they are profitable, though he said he is not familiar with Fortress’s situation.

“Typically, if you’re not doing well, it’s not a very good time to go public,” Rouwenhorst said.

As the industry continues to grow, fund managers will have to be more creative to compete, said David DeRosa, Yale finance professor and president of DeRosa Research and Trading, an economic research and consulting company.

“I don’t expect someone who’s doing the same thing year in and year out to have superior risk-adjusted profits,” he said. “The market will catch up with them.”

Yale has diversified into atypical investments to boost its endowment — which reached $18 billion last year, up from $4 billion in 1995. In 1990, Yale became the first institutional investor to introduce “absolute returns,” a category that includes hedge funds, as a formal subset of the University’s investments. Initially comprising 15 percent of the endowment, the class has risen to about 25 percent.

Hedge funds are not the best-performing asset class among Yale’s investments. They have returned an average of 12.7 percent a year since 1990, but private equity returned an average of 31 percent per year since 1973, according to 2005 figures from the Investments Office. The last 10 years have seen 39.5 percent average annual returns on private equity investments.

The Yale endowment was one of the first academic institutions to enter private equity, investing in leveraged buyouts in 1973 and then in venture capital in 1976. As of 2005, 17 percent of the endowment is composed of private equity holdings, nearly triple the 6.1 percent average of all educational institutions. Anderson said high profits from private equity investments contributed strongly to Yale’s outstanding 22.9 percent return on its investments this year.

Fortress manages $13.6 billion in private equity funds and $9.4 billion in hedge funds, according to its Web site. According to HedgeFund Intelligence, 65 American hedge funds hold assets over $5 billion as of September 2005.