Pure play Hedge Fund

It’s truly one of the few pure plays on the Hedge fund businesses. Och-Ziff is structured as a partnership that pays out the lion’s share of its retained earnings to shareholders.

One key reason why I like Och-Ziff is their managers are all about taking on very low risk-adjusted return types of strategies. Here we are talking about pre-announced cash mega merger deals in which there is 2% to 3% arbitrage returned involving a three- or four-month holding period for buying shares now at a discount to the tender value and then cashing them in when due. 

The ability to make sense — and money — doing deals like this is one of the beauties of a hedge fund, and it’s something most individual investors just aren’t equipped to do.

Another reason to like Och-Ziff is due to the anticipation of more institutional money flowing into hedge funds from corporate and public pension funds seeking ways to address looming long-term liabilities. 

Undoubtedly, some of that money seeking high returns will flow to Och-Ziff, and according to CEO Dan Och, he is “very confident” that the company will be able to capture more than its share of the anticipated money flow into the industry.

Bryan Perry Editor, Cash Machine 

Hedge fund rankings

The largest AUM are at a Connecticut firm at about 3 times Oz.  J.P Morgan’s AUM are about double Oz.  Clearly Ozm is not being hampered by its size, and has plenty of room to grow.  

When it doubles its amounts under management (Aum) you would think it could double its income.  All things being equal (caters paribus). Double income, double payout, less important double payout, double market value.  Which just makes compounding more expensive.

A.W. Jones - The Original Hedge Fund

A.W. Jones - The Original Hedge Fund 

Measuring Market Risk

Jones was light-years ahead of both Wall Street practitioners and the academic community in developing an understanding of market risk as well as the relationship between individual stocks and the market. Before the academic community had codified the Capital Asset Pricing Model (CAPM) with its notion of Alpha and Beta, Jones had developed his own measure of market risk and how individual stocks related to the market. Even more astonishing is that he was actively managing the exposure of a risk-adjusted portfolio with this system.

Jones calculated a metric for each stock called Relative Velocity, which is closely related to the CAPM's Beta (the key difference being the omission of the risk-free rate in the calculation of Velocity). Relative Velocity was the tendency of a stock, based on historical performance, to move with the S&P 500 to a greater or lesser degree. Armed with this metric, the firm could then calculate to what extent its long book and short book were correlated with market moves. What follows below is an excerpt from the 1961 Basic Report to the Limited Partners of the firm, describing in detail the measurement and management of market risk.

From the 1961 Basic Report to the Limited Partners:

ON MEASUREMENT AND REPORTING 

This is our post-graduate course. It should be taken by all partners and must be taken by those who wish fully to understand our bi-monthly reports. 

In the main body of this communication we described our investment theories and explained at least the basis of our method. It now must be made clear that such a program cannot be put into operation without careful and continuous controls. We have developed methods which provide accurate measurement of the degree of risk being taken at all times as well as a system of allocation by which we determine whether our gains or losses are attributable to stock selection or to the trend of the market. Daily computations using this method enable us to see where we stand and permit us to plan any desirable changes with regard to market risk. In addition we have a moving record of our accomplishments in market or stock-selection judgment. 

Relative Velocity

Different stocks habitually move up and down at different rates of speed, and hedging $1,000 worth of a stodgy stock against $1,000 worth of a fast mover would give no true balance of risk. We must therefore compute the velocity of all our stocks, both long and short, by their past performance, compared with the past performance of a good measure of the market as a whole. For this we use Standard and Poor's 500 Stock Index, which we consider the most scientifically constructed of the several averages. We shall refer to it below merely as the Standard 500. 

We measure, for example, the size or amplitude of all the significant swings in the price of Sears Roebuck since 1948 against the corresponding swings in the Standard 500 and find that the average extent of these moves is 80 per cent of the average extent of the moves of the Standard 500. We say therefore that the Relative Velocity of Sears is 80. 

By the same measurement (which we have made and which we bring up to date at about two-year intervals for over 2,000 stocks ) we find that the velocity of the stock of General Dynamics is 1.96. Obviously, to buy and sell short, respectively, equal dollar amounts of Sears and General Dynamics would constitute no true hedge. Instead there would have to be more than twice as much of the stable Sears stock as of the volatile Dynamics to cause them to offset each other in market risk. 

To illustrate :

This would seem to be no hedge at all, but appearances change when we correct each dollar amount by the respective velocities of the two stocks:

It must be pointed out that relative velocity has nothing directly to do with the desirability of a stock. All a velocity measurement does for us is to measure one aspect of the risk we are taking when we buy it or sell it short. Either Sears or General Dynamics might be a good purchase or a good sale, depending on all the factors that go into stock selection. From here on all the amounts used in the various examples of aggregate stock holdings will be dollar amounts after correction for velocity.

Since the Standard 500 is composed mostly of the big "blue chips," which move slowly, a portfolio of stocks commonly used for investment by us will have an average velocity over 100. Thus a list of typical stocks worth $70,000 to $80,000 in cash, might come to $100,000 after correcting for velocity (cash times velocity in each individual stock.) 

Measurement of Results 

Let us now take the simplest of cases -- a fund of $100,000 equity or net worth, with $100,000 of long positions and $100,000 of short positions (each position computed in cash times velocity.) Such a fund, being fully hedged, has a market risk of zero and all net gains or losses will be attributable to good or bad stock selection, none to the action of the market. 

For six months we maintain this even balance between long and short (this could hardly happen in actual practice,) though we shall certainly make shifts during the period within both the long and short list, thus realizing profits and losses, and then replacing the long stocks sold and the short stocks covered. Every day from the newspaper stock tables we calculate our gains and losses, arriving at a net figure for the long list and a net figure for the short list. These two figures are kept cumulatively and include both unrealized and realized gains and losses. By the end of six months, the following has happened: This is fine as far as it goes. It tells us that we have made $7,000 by good stock selection (since we are fully hedged), but it doesn't tell us how to allocate the gain as between long and short selection—perhaps we should have made more on the long side, in the market rise, or perhaps lost less an the short side. So the following further calculations are necessary: 

1) Just to keep pace with the "market" rise of 5%, our long stocks, worth $100,000 should go up by $5,000. But in fact they went up by $9,000. The difference, attributable to good long stock selection, is $4,000. 

2) Also to match the rise in the market, our $100,000 worth of short stocks should have gone up, showing us a loss of $5,000. Actually they went up only $2,000, and the difference, due to good short stock selection, is $3000.

3) For a total gain, to account for the net gain shown above, of $7,000. 

With an Unhedged Balance 

When we are not fully hedged, but have a net-long (as is usually the case) or a net-short balance, the operation has an added complication. Suppose now, still with $100,000 of equity, we are optimistic about the stock market, so we buy stocks worth $130,000 and sell short stocks worth $70,000. We hold this balance (though we may shift individual stocks) for one week, during which time the following happenes:

Our problem now is to allocate fairly this net gain.

Reporting 

Our reports go to a good many persons besides yourselves, and because we do not wish to reveal to all who receive them the size of the fund, also in order to indicate more clearly to you the change in your own partnership share, the figures for gains and losses are not stated in dollar amounts but in percentages of our net worth at the beginning of the fiscal year. Therefore if the week's results illustrated above were for the first week of the year, the report for that week would read: 

Progress : Since June 1, our fund has gained 2.1% against a gain of 1.0% in the Standard 500. On long stocks we show a gain and on short stocks a loss of 0.4%

 

These figures are the result of calculations made every day and kept cumulatively for the entire fiscal year. They include both unrealized and realized gains and losses for the period from the beginning of the fiscal year, and are calculated after brokerage expense and transfer taxes on all transactions that have taken place. 

The reports take into account dividends received on long stock and dividends paid on short stack. They take into account also, at monthly intervals in our cumulative reckoning, the interest we pay to banks and brokers. 

However, the reports overstate the eventual return to you, since they cannot conveniently, and do not, take into account the 20 per cent of realized capital gains paid over to management at the end of the fiscal year. Also, as the year goes on, the reports become more and more unfair in the comparison with the Standard 500 since to the latter should be added a small percentage as dividend yield. 

We used to report regularly and we still do report occasionally the amount that we are making in the hedged part of the fund alone. In the example above, the hedged part of the fund is the entire minority, or short list, ($70,000) combined with an offsetting $70,000 of the long list. The entire long list being $130, 000, the hedged part of it is 7/13 of the whole. We now find how much we have made in the hedged part by the following calculation: 

We keep this figure cumulatively during the fiscal year, reporting it also as a percentage (in this case 0.9%) of our equity. By a somewhat complicated method we calculate from it what we make on the hedged part of the fund as a percentage of the money actually used in it. This is a gain obtained without risk due to the trend of the stock market, and not to be had by any other form of investment procedure. 

The Risk Figure 

In the Market Judgment section of the reports you see a number variously called the risk figure, market risk, or percentage of risk in the Standard 500. From the above it is easy to see how this is obtained. Remember that our list of long stocks aggregates $130,000 only after the cash value of each stock in it has been multiplied by its velocity, relative to the Standard 500. This relates our long stocks to the Standard 500, so that $130,000 long gives us a risk on the long side alone (our equity being $100,000) of $130,000 divided by $100,000, or 1.3. Instead of using a decimal fraction we use a percentage and say that our long side risk is 130. By the same reasoning, our short risk, also exactly related to the risk in the "market", or Standard 500, is 0.7, or 70 per cent. Our net-long risk is therefore 60 (130 minus 70), which means that our net-long risk in the stock market is equal to 60 per cent of the risk we would be taking if we had our whole equity exactly invested in the stocks of the Standard 500. 

Any minus figure will stand for a net-short balance, in which we gain from a decline in the stock market. At plus 40, say, we would be incurring about the market risk of a widow with half her money in somewhat stodgy, blue-chip common stocks and half in bonds. At plus 100 to 150 we would be taking the risks of a business man with most or all of his capital in more volatile stocks. 

Containing, as it does, the velocity measurements of all of our stocks relative to the Standard 500, the risk figure is a very precise measurement of just what we want to measure. It enables us to adjust our position in the market exactly to our outlook for its probable future trend.

A.W. Jones - The Original Hedge Fund 

In the style of A.W. Jones.

Heirs to A.W. Jones by Chris Mayer Aug 15, 2011.

Last week, in The Daily Reckoning column entitled, Hedge Yourself!, I shared a few highlights from the investment philosophy of Alfred Winslow Jones, the “father of hedged funds.” Today, I’ll share some insights about some very smart guys who manage money in

In 1994, Daniel Och and the Ziff brothers started Och-Ziff Capital Management (NYSE:OZM). They wanted to earn consistent returns with low risk. In a sense, they were heirs to the ideas and techniques of A.W. Jones. And they have done him proud. The success of the OZ Master Fund, the main fund of the company, is one of the best in the business.

Since inception in ’94, the OZ Master Fund returned 14.2%, versus 8.4% for the S&P 500. That’s huge outperformance. Even more impressive is how it did so with a lot less risk. This is the idea of being “hedged.” You can see it in the performance of the fund during down months.

In all but four of the years, the OZ Master Fund actually made money during down months! And even when the fund fell, it fell far less than the market. With performance like that, it is no wonder Och-Ziff today manages $30 billion in assets, mostly institutional money such as endowments, pension funds and the like.

In the world of money, Och-Ziff is known as an alternative asset manager, an option becoming increasingly popular post-crisis. Based on various surveys, institutions are likely to boost their allocations to alternative managers more than threefold from 2009. This is a good tail wind for Och- Ziff. So one catalyst for the stock is growing that $30 billion number.

But what I really like about Och-Ziff is the people and the structure of the company. Successful money manager Martin Sosnoff was once asked how he invested in management teams. What did he look for? He answered: “I am always looking to buy owner-managers who want their stock to go up for solid reasons.”

Och-Ziff has exactly that. Dan Och is CEO and head of the investment committee. Och and his partners own nearly an 80% economic interest in the same assets at OZM shareholders. The firm went public in 2007, and these insiders have a five-year lockup. That means they can’t sell until late 2012. I would expect the partners to cash out some of their stake at that time. They have every incentive to the get the stock price up before then.

Moreover, they eat their own cooking. Of the $30 billion in assets under management, about 9% is money the partners and employees invested themselves. They have every incentive to do well in their funds because a good chunk of it is their own money. Plus, the partners take no salary or bonus. They get paid the way shareholders get paid – through distributions.

Those distributions are fat. Och-Ziff pays out 80-90% of its earnings. In the past three years, distributions per share were $1.42, $0.19 and $0.88. The distributions reflect the performance of the year prior. They took a hit in the financial crisis in 2008, as you can see with the low distribution in 2009. But they have since recovered. For the last 12 months – which includes the first quarter of 2011 – the stock’s paid $1.01 per share, for a near-10% yield!

In 2011, Och-Ziff should earn around $1.50 per share. Take 85% of that and you get $1.28. On $11.25 per share, that’s an 11.3% yield this year. The big dividend is always the last dividend, declared at the end of the year and paid in February. In 2012, the stock could earn $1.80, which would pencil out to yield of 13.6%, based on the current share price.

Key risks? There are always at least a few. One is there is some discussion of raising taxes on publicly traded partnerships. If subject to full corporate taxes, Och-Ziff would suffer a 20-25% drop in net profits. However, this has been bandied about for a while, has gotten lots of press and is at least partially discounted already. Plus, such a rule would likely be phased in over a number of years, softening the blow. The other key risk is what we called “key man” risk in my banking days. If Dan Och got hit by a bus, that would have a big impact on the firm that bears his name.

Let’s see if Och-Ziff meets my CODE criteria:

Cheap? The stock market is a market of secondhand goods and it can help to think about why the shares are for sale at all. The insiders sold a piece of the business to the public at over $30 per share in an IPO in late 2007 (and invested 100% of the proceeds in Och-Ziff funds). Today, OZM is half that. Asset managers typically get valuations of 19 times management fees and 9 times incentive fees. The former fees are valued highly because they are very stable, and the latter less so because they are more volatile. Using the blended 14 times for Och-Ziff gives us a value of about $21 per share on $1.50 in earnings, which seems fair, if conservative. When you consider Och-Ziff has grown assets under management at a 19% clip since 2001, it looks cheaper still. Looked at another way, the stock trades for about 10 times 2011 earnings. A growth stock, yet you are not paying for growth. The high yield offered also protects the downside here.

Owners? Och-Ziff aces this test, which forms a key part of our thesis, as I discuss above.

Disclosures? One of the most transparent companies in the business. It’s also a simple business. Gather assets, get paid. Invest well, get paid. There is little mystery here.

Excellent financial condition? Och-Ziff has few assets of its own, mainly cash, tax assets and some investments. What it has is $30 billion under management, a great brand name in the business and a team of talented and vested insiders. There is little debt, especially compared to its huge cash flows. Och-Ziff is in excellent financial condition.

Asset management is one of the best businesses in the world. It generates a lot of cash and has little need to reinvest that cash in the business. (Hence those fat distributions.)

I like Och-Ziff. 

Secure dividends

  Somehow I don’t see Hedge fund dividends as secure as pipelines that feed utilities. 

Ozm compared to Kinder Morgan

With pipelines there are two ways we bring in cash. Spot tariffs on pipelines are higher than contracted rates, though they forsake the reliable cash generation that comes along with contract agreements. 

Kinder favors the long term contracts that fuel our steady dividends.  Ozm’s incentive distribution is more like selling in the spot market. Both companies have a blend. Kinder's Trans Canada pipe is about 80% contract, 20% spot (Contracts sold to committed shippers is 708,000 barrels per day (bpd), Trans Mountain total will be 890,000 bpd). 

Ozm contract fees covers more than cost, but incentive fees supply most of the distribution.  That means that Kinder can determine its dividends further out. Ozm has to wait until it is actually earned to know how much it will pay out. 

Somehow it seems like OZ is out of touch with what Investors want. He thinks if he shows a record of incentive payouts, that Investors will pay for the unearned, uncontracted, evaporatable income payments at greater multiples in the share price. He must think its like a credit card report that gives you more points for a longer payment history. 

Insider buying is a clue that both look undervalued from the inside.

Daniel Saul Och part 2

Daniel Saul Och part 1

Jon Parepoynt

Great article. I agree with the premise and believe OZM is under followed and under owned. I think it is far better to own the shares of the hedge fund managers than their products. In addition, many hedgies use their shares as additional compensation, meaning management has a very vested interest in keeping share prices high.

One interesting note is that during the financial crisis, other funds were hedging their redemptions while OZM embraced them. This higher transparency has led to a better reputation in the sector. 

Jon Parepoynt Seeking Alpha

Charts tell the story

This chart shows Total Return, the only thing that matters in an IRA.  Charts were going OK until they dropped that $0.75 dividend on us last February.

Ozm hit another new high and an s/a article came out today.  Ozm is the fifth largest hedge fund firm and one of the fastest growing with a compound annual growth rate of approximately 19% over the last 11 years.

This is the deal with management companies, assets under management, not how much they make in the markets each year.  The Hedge Fund they manage has returned more than double the S&P 500 while taking less than a third of the risk.  Like Kmr the LLC pays out nearly all its income to shareholders.  The dividend pays 7.7%.  Quarterly distributions are considered a return of capital, not interest or dividend income, which means a K-1s and tax advantages.

I only went with these guys because of my interest in the Investment Counsel business which I understand, and my belief that the management companies prayed upon Investors and Private Bankers.  Risk of dilution is high as OZM could sell new shares of stock and use shares to pay help.

These charts tell the story

This chart shows the current jump in P/E ratios that is causing the rise.

Investors are pissed off at them because they diluted the shares to pay off debt a few years ago.  This shows in a low P/E ratio.   Och-Ziff reckons this distributable-earnings figure is a more accurate gauge of its performance than Earnings per share.

Using a dividend discount valuation methodology off of Bloomberg (above) intrinsic value looks to be approximately $17.50 per share, or about 34% higher than the current price.

Och-Ziff: Underappreciated Catalysts May Reward Shareholders

Editor's notes: Past corporate structure choices have left OZM undervalued despite its track record as a top-tier asset manager. Firm has multiple upcoming catalysts and offers 35% upside.

The SEC a decade ago relaxed some of the stiff rules around hedge funds and private equity firms. Starting with Fortress Investment Group (FIG) in 2006, some of the larger funds have started to list equity in their firms on public exchanges. While only a couple of dozen have the organizational characteristics to do so, it does present the individual unaccredited investor an opportunity to invest with some of the top money managers of all-time.

Daniel Saul Och presentation

Daniel Saul Och

Thanks, Tina. Good morning, everyone, and thank you for joining us. This morning, I'll briefly review our year-to-date investment performance and our assets under management. I'll also update you on our capital flows and on the environment we see for investment opportunities globally.

During the third quarter and again in October, we generated strong performance with low volatility for our fund investors, further extending the strong absolute returns we generated in the first half of this year. The flexibility we have to move capital across strategies and geographies was again evident, and we remain highly opportunistic in capitalizing what we viewed as the best investment opportunities. 

Our investment teams operate within the framework of our consistent and disciplined process to identify the opportunities globally. This approach has been central to the repeatability of our returns historically and the subsequent value we have created for our fund investors.

We remain confident that allocations to hedge funds will grow. We believe institutional investors will continue to increase the proportion of their portfolios, investing with alternative managers to enhance their equity and fixed income returns. According to HFR, net inflows to hedge fund industry during the third quarter of this year were the highest in 9 quarters, and year-to-date, they exceed those for all of 2012, suggesting an improving trend line. While these are just a couple of data points, we believe that we are well positioned to benefit as capital allocations to the industries increase.

Now let me turn to our assets under management. As you saw in the 8-K we issued this morning, our assets under management as of November 1 totaled $38.5 billion. This amount reflects growth of $5.9 billion or 18% from $32.6 billion on December 31. The year-to-date increase was driven by approximately $3.5 billion of performance-related appreciation and $2.4 billion of net inflows, which includes the 2 CLOs we closed this year.

Pension funds and private banks remain the largest sources of our net inflows year-to-date. We continue to experience strong interest from fund investors across our platforms and have made solid progress in establishing relationships with new investors. Excluding the CLOs we've raised, our net inflows through September 30 have improved significantly year-over-year, driven by an increase in our gross inflows, which are more than 50% higher than they were for all of 2012. Although we can't predict future flows, the trend in our net flows appears to be improving.

We also made significant progress in expanding the capabilities of our fund investor relations team through additional hires globally and restructuring the team to focus on important sources of a new capital. We believe that these steps position us to attract significant additional assets, not only to our well-established multi-strategy platforms but also to our growing credit, real estate and long/short equity platforms. These 4 areas remain our strategic priorities for asset growth, although we continue to look for additional opportunities to meet the needs of our fund investors.

Now let me give you a quick update on our fund's investment performance. Year-to-date through October 31, our Master Fund was up 10.9% net, our Europe Master Fund was up 10.1% net, and our Asia Master Fund was up 10.5% net. These returns were generated with 36% of the volatility of the S&P 500 Index on a weighted average basis for these funds.

Our year-to-date performance continued to be driven primarily by our long/short equity and credit-related strategies. During the quarter, we took advantage of market volatility to enter a long/short equity allocation, where our focus remains on selecting positions with defined events and catalysts while also seeking investment opportunities with strong underlying fundamentals.

We remain fully invested in the Master Fund. In the U.S., with an improving economic backdrop, we continue to be cautiously optimistic about growth prospects for the medium term, but we remain patient, thoughtful investors. We believe the current environment plays to our strengths and our global reach.

Joel Martin Frank

Joel Martin Frank

Thanks, Dan. This morning, I'll review our 2013 third quarter results and discuss how we are thinking about expenses for the fourth quarter.

For the third quarter, we've reported GAAP net income of $25 million or $0.16 per basic and $0.14 per diluted Class A share. As always, our press release includes a detailed discussion of GAAP results.

Now let me turn to the 2013 third quarter economic income, starting with revenues. Management fees totaled $138 million, increasing slightly on a sequential basis as assets under management grew approximately $1.2 billion from April 1 to July 1. From July 1 to October 1, our assets under management grew another $1.7 billion to $37.8 billion.

Our average management fee for the quarter was approximately 1.5%. As a reminder, the management fees we earn vary based on which platforms our assets under management are invested in, and we anticipate that our average management fee will fluctuate over time based on the mix of products that drive our growth.

Incentive income was approximately $72 million for the third quarter. The majority of this amount related to crystallized incentive income earned on the expiration of approximately $800 million of 3-year multi-strategy assets with the remainder related to redemptions. The majority of these assets were  reinvested for an additional 3 years in the same multi-strategy platform and the remainder across other platforms within the firm.

Now let me turn to our third quarter expenses. Comp and benefits totaled $28 million during the third quarter of this year. Of this amount, salaries and benefits were $23 million, up 6% from the second quarter, and the remainder were primarily guaranteed bonus expense. The increase was driven by our hiring activity globally during the quarter on both the investing side as well as the infrastructure side.

Salaries and benefits were 17% of management fees in the third quarter. We anticipate that this ratio will remain approximately 16% to 18% of management fees for the fourth quarter of this year.

In addition to employee bonuses, our Partner Incentive Plan will also impact our compensation expenses in the fourth quarter. As a reminder, our eligible pre-IPO partners may receive an annual discretionary performance award, which will be a mix of partner units and cash. We can award a maximum of 2.8 million units this year and 10% of the annual incentive income we earn up to a cap of $39.6 million.

Now turning to non-compensation expenses. Non-comp expenses totaled $29 million in the third quarter, a decline of 15% sequentially, primarily due to a net increase in professional fees. Non-comp expenses totaled 21% of management fees in the third quarter, and we anticipate this ratio to be 21% to 23% for the fourth quarter.

Our third quarter effective tax rate was 16%, declining sequentially due to an increase in our estimate of annual incentive income for this year, which impacts our full year effective tax rate calculation. As I've discussed in the past, our effective tax rate is impacted by several factors, including the amount of revenue we generate and how our revenue and expenses flow through our legal entity structure. As a result, our actual quarterly and annual effective tax rates can vary materially from our estimates. We estimate that our effective tax rate for the fourth quarter of this year will be in the range of 15% to 20%.

Our third quarter distributable earnings were $130 million or $0.27 per adjusted Class A share. As we disclosed in our press release this morning, our dividend for the third quarter is $0.25 for Class A share. As we approach the end of the year and begin to look towards 2014, I'd like to again emphasize the elements of our model which position us to deliver superior earnings growth over time.

Our year-to-date investment performance has been very strong, demonstrating the repeatability that our investment and risk management processes have achieved historically. Our assets under management have increased by 18% during the same period.

As Dan mentioned, current and prospective fund investors have reacted positively to our performance,  and this remains the most important criteria in their decision to invest capital with us. We believe we are well positioned for additional asset growth and that we will see continued acceleration in organic net inflows as our business diversifies.

Complementing our investment performance and asset growth is a financial model that is simple and transparent with a clear linkage between our distributable earnings and our dividend. First, the management fees we earn more than exceed our fixed operating expenses, and our cost structure is scalable, meaning that we expect our operating expenses to grow at a lower rate than our assets under management over time. The results in operating leverage flows directly through to our distributable earnings.

Second, we earn 20% incentive income annually in cash on the majority of our assets as we generate investment returns. And the incentive income we earn as revenue is not subject to callbacks, and the majority of our assets under management are not subject to hurdle rates. Cash bonuses, which are discretionary, are the only operating expense paid out from the incentive income. The remainder flows directly through to our distributable learnings.

The assets we have in platforms and earned incentive income cumulatively over a multiyear period, such as our 3-year multi-strategy or dedicated credit assets, also create significant additional earnings potential. The sort of objective of the structure is reflected in our distributable earnings and dividends both this year and last year.

Third, as our assets grow, we earn management fees and incentive income on that growth. Year-to-date through November 1, our assets under management have increased by $5.9 billion. We are earning management fees and incentive income on that asset growth, which have been and will continue to be reflected in our earnings this year. 

The compounding effect of asset growth on our distributable earnings and dividends can be significant over time. Henceforth, our dividend policy is to distribute substantially all of our distributable earnings as dividends to our shareholders each quarter. We believe that the combination of these elements is a powerful driver of our current and future earnings potential.

Chinese opportunity

Daniel Saul Och

Look, it's a long-term opportunity, I don't think anyone knows. I think it's fair to say that it's potentially significant. You'd want to be one of the firms that were selected, and it's a good example of where -- what we do at our firm in terms of our reputation, our preparedness and our commitment to geographic expansion, and having a significant business is relevant. 

We've had an -- operations in Asia since 2001. We do have an office in Beijing. We've been investors in China. Our firm has a relation -- a reputation in China. And we think that, along with the global relationship of the firm, was relevant to the decision. 

So doing those types of things, it goes back to my comment about the retail distribution. We're not going to plan for distribution. We're not going to be the ones to figure out the distribution channel. 

We want to be the ones -- when people say, "We want the best. Who's the best? That's our goal," we want them to say, "Och-Ziff," in any of the areas we're focusing. If we can do that, then we're doing the right things for our clients, and we'll grow.

Investment opportunity

Daniel Saul Och

Sure. If you look at how we've grown historically, it's been a .. whether it's geographically or by investment discipline, it's finding an area where we think there is an opportunity, dedicating, committing, building a business, doing it in a way that works for the clients who invest in that area and for the rest of the clients and for the firm. 

So what we mean by that is very simple. The .. right now, our multi-strategy funds, our credit funds, our long/short equity funds and our real estate funds, which are our strategic growth areas, are all very significant and provide a lot of opportunity. 

Having said that, we're always on the lookout for areas where we think we can provide value to clients. Some of that will just lead to new things that we do within the current fund structure. It is potential that it can lead to new investment opportunities. 

Our new products tend to be driven by where we see investment opportunity, not necessarily where others are marketing funds or raising assets. That's the key.

Answers

Daniel Saul Och

We're seeing demand and client allocations in a number of different areas. If you look at credit, we presently have about $6 billion of assets under management in the credit area. You'll recall, some topic on these calls, we would talk about what it's going to take to get the first billion. We've also got demand for our multi-strategy product, a lot of interest in the real estate side, a lot of interest on long/short equity side. So what we're really seeing is, across-the-board interest in our products, across-the-board interest in the way Och-Ziff does things, a desire to establish new relationships with Och-Ziff and to increase relationships that have occurred. If you've heard Joel note on the call, the 3-year tranche that generated most of the incentive this quarter rolled into a new similar structure. So that's always very, very important to us.

We don't disclose those numbers, but it's been across the board. It's new investors. It's current investors increasing. It's current investors interested in expanding the relationship with us. This concept, for them, they look at the quality of our investment products.

They look at the quality of the organization, of its controls, of its operations, of its transparency, and we think all that's playing out well. We also feel good about the fact that the expansion is -- we feel is benefiting all of our investors.

For example, on the credit side, we now got $6 billion of assets under management on the credit side. We've dramatically increased our resources and capabilities over the past several years on the credit side. If you're an investor in a multi-strategy fund, you're benefiting from that. You're benefiting from the flows. You're betting from -- benefiting from the capabilities.

You're benefiting from the increased product capability. We -- same thing with the real estate side. There's no doubt that investors in the credit funds and the multi-strategy funds have benefited from the capabilities we have on the real estate side, and we believe investors on the real estate side also benefit from the flows and product coming from other areas of the firm.

And that's always -- it's been a very important part about how we think about growing. Where do we think we have capability? Where can we deliver value to clients and excess return to clients? And where can we do it in a way that benefits all of the investors?

No, it's mostly -- you talk about the management fee rate. Most of it relates to flows into our credit assets, which typically, as you know, have lower management fees than our other funds. But this is a very important part of our organic growth in this -- in our assets under management. So -- but that's basically the reason.

Sure. Look, our goal -- right now, we haven't done anything specific that we're discussing in terms of those new channels and platforms. Our goals, which is similar to what we do with the private banks, is not to create a channel. It's not necessarily to be the first. We want to be the best alternative available for any channel that decides to come into our space. We think we executed that well with the private banks, and that's worked well for everybody. We believe that we are -- that positions that way for any new channels. So as I said, right now, we don't have anything specific to announce. But we do believe that any new group of investors looking to come into the alternative space in the areas that we touch, we believe that Och-Ziff is one of their best alternatives. And if we maintain that, along with our infrastructure and transparency, we'll be well positioned to take advantage when it's appropriate.

Well, our concern in the credit markets has more to do with the fact that in many areas, spreads have contracted, and in many areas, prices have increased. Our goal in the credit area, our goal in expanding credit products has been to find those areas where we feel we can deliver excess return, where we feel that we can provide value that's significant to clients and do it in a way that enhances all other areas of the firm that invest on the credit side. We're very proud of the fact, as we said, that we have $6 billion in AUM. First is where we were when we first got this started. Having said that, when we look at some of the managers who are very strong in the credit area, their AUM in that asset class is substantially higher than ours. And so we think we have a lot of room to do some very good things for clients going forward.

Joel Martin Frank

Well, to your second question, we don’t think that it's really having any impact. In terms of what we're seeing in the fund raising environment, because it's -- I can't really comment on the overall industry. I don’t know what other firms are doing. But we're seeing interest in a number of different areas.

Pension funds and private banks, which have been the most robust for the past couple of years, continue to be robust. We're seeing more interest in Europe than we've seen over the past couple of years. I think that has a lot to do with the fact that Europe looks a little bit more stable.

We're seeing more interest in large clients looking to establish more significant relationships. And as long as we continue to perform and continue to drive value, we think we can continue to grow. And we like the fact that the growth is in more than one area. That's always very important in this firm. We are thoughtful about capacity.

We are thoughtful about driving returns. We're an investment-driven organization. That is what we intend to be in the future. And so when we can expand in an area such as credit or expand in an area such as real estate which has a lot of capacity, the investors in those areas do very well, and investors in other funds at Och-Ziff benefit from it. That's our formula. That's what we're going to keep doing going forward.

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Ozm presentation 2013

Credit Suisse

0. Och-Ziff Capital Management Group (OZM)
   
   
• OZM raised a $600M CLO in June:
  OZM raised its fourth CLO in as many quarters with a $600M offering in June. These four CLOs total 2.3B and represent an estimated 79% of OZM's total organic growth over the past four quarters. OZM's non-HF business (RE & Credit) has now grown by an estimated 63% since 2Q12.
  
  
• Core Hedge Fund net flows strong in 2Q13, but may dip in 3Q13:
  Based on OZM's performance/AuM disclosures, our model estimates 2Q13 core multi-strategy HF net flows of +500M, bringing the YTD total to just under 1B. However, we estimate July 1 outflows of approximately 500M and forecast total net flows of under 200M in 3Q13 (see exhibits 7-8 for more color on HF/CLO flow splits). At a recent conference, mgmt noted that they think they will grow their long/short strategy as clients have requested dedicated platforms.
  
  Credit Suisse Asset Manager Research 
  

Ten Years of Absolute Return: Top 10 of 2013 By Lawrence Delevingne

Och-Ziff Capital Management Group

Och-Ziff Capital Management Group 2003 2013 Leadership Dan Och Assets ($B) $6 $31.9 BDC Rank #3 Flagship performance 2003-2012 OZ Master Fund 139.22% cumulative 9.11% annualized

Oct Ziff's assets grew sharply from about $6 billion at the end of 2002 to $29.7 billion in late 2007 when the multistrategy investment manager took the unusual step of going public. At the time, the flagship OZ Master Fund had produced a net annualized return of 16.7% since Goldman Sachs alum Dan Och launched the firm in 1994 with Ziff Brothers Investments. Assets peaked at $33.4 billion in 2007, but fell to $23.1 billion in 2009, following a 15.9% flagship loss in 2008. Besides a 23.1% gain in 2009, performance has been purposefully muted since going public: up 8.5% in 2010; down 0.5% in 2011 and up 11.6% in 2012. In 2011, Och-Ziff launched a UCITS fund, adding another public structure. Overall, Och-Ziff has 468 employees (137 in investments) working from New York, London, Hong Kong, Mumbai and Beijing. The stock price is down about 59% since the IPO in November 2007 to $11.30 a share as of May 30. 

Where hedge funds got the dough ~ Les Leopold

Les Leopold shows where the money comes from that Hedge Funds get away with siphoning off people’s wealth.