ANALYSIS-UPDATE 1-Cerberus loses bet on Chrysler

* Fund long said would forgo profits on Chrysler auto

* Exposure to auto and financial estimated up to $1.7 bln

* Observers say a blow but just one part of portfolio (Adds quotes from professor in paragraphs 22-23)

By Megan Davies

NEW YORK, April 30 (Reuters) - When Cerberus Capital Management struck a $7.4 billion deal to buy Chrysler in May 2007, it made a big, risky bet that it could succeed in turning around an American icon.

It declared that the carmaker would benefit from life out of the spotlight, without the pressure of quarterly reporting.

"Our capital is patience," Cerberus Chairman John Snow said on striking the deal.

But the failure of the No. 3 U.S. automaker could not have been a more public black eye for the private equity firm that has struggled for the past two years to make the investment work.

"This is what happens when you make an investment in a highly cyclical business at the peak of a cycle," said Steven Kaplan, a professor of finance specializing in private equity at the University of Chicago. "It's very risky and often ends badly and this one did."