Och-Ziff Posts Quarterly Loss
By Emma Trincal, Senior Financial Correspondent
Wednesday, April 30, 2008

NEW YORK (HedgeWorld.com)—Och-Ziff Capital Management Group LLC’s first-quarter results, released Wednesday [April 30], indicate that the hedge fund, while bigger and more transparent, is not among the top-performing hedge fund managers. The firm posted a loss for the first quarter and has not grown in size since the end of last year.

The $33.3 billion New York firm went public in November on the New York Stock Exchange at a $32-per-share offering price Previous HedgeWorld Story.

Now Och-Ziff is forced to disclose its performance to the public, both as a listed company and as a hedge fund. As a public company, Och-Ziff posted a quarterly loss of $268.1 million. In a statement, Och-Ziff attributed the loss to non-cash expenses associated with the firm’s reorganization following its IPO.

Perhaps more significant for hedge fund investors were the performance and asset growth figures disclosed in the quarterly report, which shed some light on Och-Ziff as a hedge fund and private equity management model. Year-over-year, assets grew by 30% to $33.3 billion as of March 31, 2008, from $25.7 billion on March 31, 2007. But this was before the IPO. Since the end of 2007, when assets amounted to $33.4 billion, the firm’s asset size has essentially remained flat.

In a conference call, Daniel Och, Och-Ziff’s founder, chairman and chief executive, said the main issue behind the stagnation of assets under management this quarter was not a surge in redemptions but instead a slowdown in inflows. But he pointed out that such a trend is universal. "Lower inflows have affected the hedge fund industry globally," he said. "As the capital markets have become more volatile and challenging in recent months, investors have reduced their exposure to hedge funds generally and slowed the pace at which they committed new capital to the industry."

Answering a question, Mr. Och said that redemption volume was essentially unchanged for the first quarter. He mentioned a $250 million redemption, which he said was "tax-related," and took place during the quarter. But such "tax-related redemptions" won’t recur after April, he said.

Still, the freeze in assets for this well-established manager is puzzling, even in light of today’s tough market conditions.

Many hedge funds considering going public as a way to secure permanent capital ought to look at the potential downside of such a decision, which is complete transparency.

As a hedge fund manager striving for growth, did it help a firm like Och-Ziff to go public? Francis Gaskins, president of IPODesktop.com, a Los Angeles-based IPO research firm, said he doesn’t think so. "The IPO has made it hard for them to add assets," he said in an interview. "It has hurt them because everybody now knows they’re not a great manager."

Mr. Gaskins based his view on the performance of the firm’s hedge funds, but his take may be severe considering the overall market. Since the beginning of the year, the Standard & Poor’s 500 stock index is down 3.9%. The worst-performing Och-Ziff hedge fund—OZ Asia Master Fund—was down 2.61% in the first quarter. The most resilient among Och-Ziff’s funds—the OZ Global Special Investments Master Fund—only lost 0.6%.

When compared to hedge fund performance, Och-Ziff is more or less in line with the rest of the industry. Most strategies across most indexes have posted losses. The Credit Suisse/Tremont Hedge Fund Index, for instance, fell 2.11% during the first quarter of this year.

"They’re in the game, but they’re not standing out. They’re just average," Mr. Gaskins said of Och-Ziff.

Mr. Och explained these results as part of his firm’s main mission. "We successfully preserved our fund investors’ capital," he said, adding that most of the firm’s investors are conservative institutional investors, in particular pensions. "They consider preservation of capital in declining markets equally important to attractive returns in positive markets."

However, looking back, Mr. Gaskins said he is not convinced that the picture is so rosy. "Historically, Och-Ziff has underperformed the S&P 500 index for years," he said.

The comparison of the firm’s performance with the benchmark may not be fair. Mr. Och said during the call that his firm’s returns were generated with less than half the volatility of the S&P 500 and essentially no leverage.

Mr. Och tried to give a positive pitch during his call, emphasizing some areas of future growth for the firm. "While we believe market conditions will remain challenging for the balance of this year, we continue to see considerable opportunities in the current environment for our time-tested investment approach," he said.

One of the products Och-Ziff intends to create soon, Mr. Och said, is an emerging market platform. Mr. Och said he plans to add two to three people in Asia this year and the same headcount for both Europe and the Middle East.

Och-Ziff continues to be a model in the hedge fund industry, perhaps because its steady and consistent returns do indeed appeal to pension funds. Another advantage has been a low level of investor redemptions. And Mr. Och said his firm can retain talent. "We have one of the highest retention ratios in the industry," he said. Sixteen out of the 18 partners have been at the firm for 10 years, he noted.

Despite those positive features, Och-Ziff represents a much bleaker picture for stockholders. As with other hedge funds that conducted IPOs last year, Och-Ziff’s stock performance has been below par. Since November, the stock price is down 38%.

To be sure, Och-Ziff is far from being alone as a poor performer in the public markets. Shares of The Blackstone Group, trading today at $18.90 per share, are down 46% from their IPO price in June. Fortress Investment Group LLC, which went public in February 2007 at $30 per share, has fallen by 51%, and the stock is worth $14.65 today.

Och-Ziff shares closed yesterday at $19.29. In intra-day trading, Och-Ziff’s share price fluctuated between $18.85 per share and $20.03 per share. In late-morning trading, just as the company’s conference call ended, the share price was down 1.6% at $18.98. By mid-afternoon, the stock price had recovered, trading at $19.78 per share.

The firm will release its performance figures for April on Friday [May 2]. "We are satisfied with these numbers," said Mr. Och.