Wednesday, March 19, 2014

Tripoli hotel under investigation for bribery

Tripoli hotel
The U.S. lifted most of its sanctions against Libya after Moammar Kadafi agreed to dismantling the country’s  nuclear-weapons program in  2004.   Americans raced to investment money in the North African nation, which was benefiting from oil sales and recently had opened up to foreign investment. 

Authorities are examining investment deals made around the time of the financial crisis and afterward.  Ozm was an investor in a joint venture to construct a luxury hotel in Tripoli which has come under scrutiny in a probe on the use of placement agents to conduct deals in Libya.  

White House
The White House said that financial service providers would be able to support transactions to buy and invest in Libyan oil and products because it served U.S. interests.  Then when companies do business, and encounter business conditions that the U.S. government no doubt knew it was going to encounter, the company then becomes the subject of a law enforcement inquiry.

Investigators began in 2011 trying to determine whether firms violated the Foreign Corrupt Practices Act which outlaws the payment of bribes by US companies anywhere in the world.   Regulators have been investigating how the Libyan Investment Authority made investment decisions before the toppling of Muammar Qaddafi’s regime in 2011.

Och-Ziff felt the investigations were not serious enough to mention until the recent Och-Ziff 10K.  Investigators are examining an investment by the $65 billion Libyan Investment Authority  sovereign wealth fund based in Tripoli, in some of Och-Ziff  funds in 2007 and investments by some Och-Ziff  funds, both directly and indirectly, in a number of companies in Africa.  

Sunday, March 9, 2014

Nine reasons for the shift to bigger funds

Alfred Winslow Jones was the first money manager to combine short selling, the use of leverage, shared risk through a partnership with other investors, and a compensation system based on investment performance.  

The Hedge fund management business has evolved offering clear advantages for the big money to move to the largest firms like Ozm.  These are nine concerns of Hedge fund investors that propel this trend.

1. Abrupt closures 
Hedge funds can close because of the loss of large investors, untimely investments or simply bored managers that have more than enough money and are sick of meeting client expectations.

2. Holdback
When a client cashes out, funds can retain 10 percent to 20 percent of assets until its annual audit is completed.  Investors can be forced to sit and wait as the money earns nothing while they make sure the NAV is correct.  The other 10-20% “holdback” doesn’t come back until the hedge fund’s annual audit which could be up to a year later.

3. Gate provisions
Making contributions to hedge funds is easy.  They want your money, so you can usually invest on a monthly basis without much notice.  But try getting your money out.  You usually need at least 90 days’ notice and even then you can only redeem on a quarterly or annual basis.  The purpose of the provision is to prevent a run on the fund, which could cripple its operations, as a large number of withdrawals from the fund would force the manager to sell off a large number of positions.

4. Opportunity cost
One Investor confesses that their institution was invested in a hedge fund that decided to return capital to investors.  They were given the choice of taking a huge write-down up front or getting the money back as the investments were sold off.  They decided to wait, and it ended up taking four years to get the entire investment back.   Each time they sent chunks of money back, the remaining funds got marked down even further.  The risk that  greater “benefits” could have been obtained with another option is the lost opportunity.

5. Lock-up
Many funds have at least a 1 year lock-up with your initial investment but it is possible that the lock-up can be 3-5 years in some cases before you can pull your money out.  The lock-up period helps portfolio managers avoid liquidity problems while capital is put to work in sometimes illiquid investments.

6. Investment period
Private equity also comes with huge opportunity costs.  You don’t simply hand over the amount you commit to the fund on day one and start investing.  With extensions, the investment period could last up to 10 years.

7. Capital call
Plus, you might only get about 2 weeks’ notice before a capital call is due for investment with no idea about the size so you cannot plan your liquidity ahead of time.

8. Commitments
With the majority of funds, you don’t pay management fees on your invested capital.  That would make too much sense.  You pay on your committed capital.  So if you have $30 million committed to a fund but they only call $500,000 in year one, your 2% management fee is over 100% of invested capital.   Committed capital, is usually not invested immediately, it is “drawn down” and invested over time as investments are identified.

9. Redemption suspension
Similar to Gate provisions but doesn’t allow for withdrawals at all.  Depending on the terms of the hedge fund, a manager generally has the ability to implement this at anytime. 

Friday, March 7, 2014

The core business of asset management

Asset management is a systematic process of operating, maintaining, upgrading, and disposing of assets cost-effectively.

Larry Fink talks about the core business of asset management.  The effects of herding on the markets. Index funds, liquidity, risks of leverage, and what Blackrock actually does.

Investment secrets and economic theories ~ Ray Dalio

Bridgewater is the largest hedge fund in the world, so it makes sense to understand how its founder views the mechanics of our economy.   Ray Dalio created this simple but not simplistic and easy to follow 30 minute, animated video that explains, how the economy really works?

To understand demand properly, you must know whether it is funded by the buyers' own money or by credit from others.

Research paper pdf 1. How the Economic Machine Works 

Research paper pdf 2. Debt cycles

Research paper pdf 3. Productivity

Based on Dalio's practical template for understanding the economy, which he developed over the course of his career, the video breaks down economic concepts like credit, deficits and interest rates, allowing viewers to learn the basic driving forces behind the economy, how economic policies work and why economic cycles occur.

Paul A. Volckerthe former Fed chairman, a fan of the cartoon, described it as “unconventional but it casts strong light on how the economy actually works, with its history of repetitive and ultimately destructive excesses in credit creation. The analysis points the way to practical ways central banks and governments can ease the pain of defaults and deleveraging.

Wednesday, March 5, 2014

World Economic Forum in Davos, Switzerland

In 2009 Daniel S. Och head of Och-Ziff Capital Management Group LLC, spoke on, ‘Scenarios for the Future of the Global Financial System,’ at the Annual Meeting of the World Economic Forum in Davos, Switzerland.

Dan said that differentiation would increase significantly among hedge funds, a market that has had few barriers to entry. 

Those that have performed well, demonstrated transparency, and maintained trust, would continue to do well, but poor performers with over leveraged portfolios, that had suspended redemptions during the crisis would not.

Thursday, February 6, 2014

Tuesday, February 4, 2014

Understanding Hedge Funds terms

Absolute returns 
Unlike long only funds, hedge funds use absolute returns instead of relative returns.  In reality the only index to beat is cash, and the relevant view is from the beginning of your Investing life until the end.

Alternative investment managers
By investing in alternative investment managers, you can benefit from potentially greater asset inflows as more investors become comfortable with the idea od directing their capital into their funds.  The funds do not share in Client losses, winning fees go straight to bonuses and shareholders. 

Assets under management (AUM) comes from inward capital cash flows, as well as retained investment returns. There are trillions of dollars of global money looking for a RELIABLE return higher than government bonds but with LESS risk than long only equity. It takes a certain amount of back office to run a fund. You have regulatory costs, staff, research and computers. On a small firm the 2% won’t cover it, which is where the performance fees came in. But when the fund gets really big, the 2% will cover the costs for additional offices to bring in more Clients.

Benjamin Graham
Early Hedge Fund operator. It involved a partnership structure, a percentage-of-profits compensation arrangement for Ben Graham as general partner, a number of limited partners and a variety of long and short positions.

Carried interests
Partners are taxed on their share of partnership income only when a partnership-level realization event occurs, regardless of how long it takes for such an event to transpire or how many years go by before realized funds are distributed.  It happens when the income comes in short term and is deferred or carried until it is long term for tax purposes. - Carry

Distributable earnings
Measure profit minus adjusted income taxes. Och-Ziff reckons this distributable-earnings figure is a more accurate gauge of its performance than Earnings per share.  Market watch

40 Act
The “40 Act,” as investment professionals often refer to it, are Hedged mutual funds which comply with the Investment Company Act of 1940. 40 Act funds, can be owned by small investors and must have daily mutual fund redemption, whereas real Hedge Funds are not regulated, not liquid and require Millionaire investors.

Fee based
The fee based part of the dividend is more predictable than the performance fees. A Hedge Fund may have fees that barely cover expenses in years with low incentive fees, and receive relatively gigantic payouts during periods when the performance fees apply.

Hedge fund
An expression believed to have been first applied in 1949 to a fund managed by Alfred Winslow Jones. His private investment fund combined both long and short equity positions to “hedge” the portfolio’s exposure to movements in the market.  Hedge funds are largely unregulated and therefore are free of the restrictions that keep most mutual funds from pursuing untraditional investment strategies like selling short and investing in complex derivatives.

Hedge fund managers 

Have their own money on the line usually seeking absolute returns.  The 20% of profits is particularly beneficial since that income generally receives favorable capital gains tax rates.  Being allowed to own the management company sidesteps those charges and the stringent income and net worth requirements attached to hedge fund investing. 

Investment banks 
The core activities of investment banks are subject to regulation and monitoring by central banks and other government institutions - but it has been common practice for investment banks to conduct many of their transactions in ways that don’t show up on their conventional balance sheet accounting and so are not visible to regulators or unsophisticated investors.

Unlike many hedge funds, Och-Ziff uses very limited leverage, the practice of borrowing multiples of the firm's assets under management to enhance returns.  Management gets 20% of the profits on other peoples money when it goes up, none of the losses when it goes down. 

The loophole is that the limited partnership is being taxed as a partnership.  The lawmakers say it is compensation for work and should be taxed as such.  If it should be abolished  the profits for the asset managers will be significantly curtailed by increased taxes.

Och-Ziff Capital Management Group LLC - Prospectus 

Private equity
Multi-million-dollar blocks of “private” capital from a limited number of wealthy investors or institutions, as opposed to the “public” money from unlimited numbers of investors holding exchange-traded, SEC-regulated securities.  Investors in private equity funds contractually limit their ability to withdraw their capital. 

OZM revenue is primarily derived from its management fees and incentive income.  Management fees equal between 1.5-2.5% annually of the assets under management, and are set and charged at the beginning of each quarter, based upon the amount of assets under management.  Performance fees, also known as incentive income, generally equal 20%, of the net returns earned by the funds, and form the majority of the firm’s revenues. This poses a problem in bad markets, as the funds have high-water marks that prevent the manager from receiving performance fees unless the fund is above its previous greatest value.

Risk is not the relative risk of beating some made-up average on retirement day. Risk is not having enough to make partial withdrawals for thirty plus years. It is always a blend of how much to keep earning and how much to spend.

One of the things that you might notice. Instead of offering a product and trying to sell it like a mutual fund salesmen.  Instead he acts as Investment Counsel which earns higher fees.  Emphasis is on finding out what the client needs and providing it on a three year agreement with 2% and 20% fees.  Then getting them to bring him more problems to solve, so that they re-up with more funds later on.  Instead of offering one strategy to all, they try to mold a strategy to meet the pension fund or Investment banks clients needs.

Two and Twenty
Investment Counsel use to get 2% annually of assets under management, Hedge funds enjoy the “two and 20" fee structure, in which asset managers are paid 2% of assets and 20% of profits.

The French word for “slice." A piece, portion or slice of a deal.

Volatility of expected return
 This is what Wall Street calls this risk.  Volatility is not risk when it is anticipated.

Monday, February 3, 2014

Justice Department Probes on Possible Violation of Antibribery Laws

At the center of the probe is a group of middlemen, known as "fixers," operating in the Middle East, London and elsewhere. The fixers established connections between investment firms and individuals with ties to leaders in developing markets.

The investigation is looking at fixers' roles in arranging deals between financial firms and Libyan officials. The fixers acted as placement agents. In some cases, the sovereign-wealth-fund fixers collected a "finder's fee."

Fees paid to placement agents can be legal or can be considered bribes, depending on the size of the fees and the nature of the agents' relationship with the parties to the transaction.

Among the deals being scrutinized is a $120 million hotel project in which Och-Ziff had a stake—a joint venture involving U.K.-based InterContinental Hotels Group as well as a Libyan developer and the Libyan Investment Authority to build a luxury hotel in Tripoli.

Friday, January 10, 2014

Exit strategy

When I learned that China was being overlooked by Wall Street, I wanted a piece of the action.  This was late 1990s.  So first I built positions in all of the China funds on the NYSE.  I learned Mark Mobius was the man to watch, he taught me to let the manager do whatever he wants without limits.  

This led me to a global fund which out performed the S&P enough to pay for my Porsche.  During one of his seminars, this one was in New Zealand, he let slip that he was getting much higher returns on private capital.

In the US only the rich are allowed to get richer using private capital.  It is still that way, three million dollars will not get you in.  Which is why I became interested in a private capital management company that I owned in my Insider portfolio?  

While we cannot Invest in the companies investment properties directly, we can own the management company and earn fees from those very same funds.  They tell me the same thing.  Not to restrict them to any ideas or countries and let them do their own thing too bring us higher risk-risk-adjusted absolute returns.   

Och-Ziff makes investments on a global basis with headquarters in New York City and offices in London, Hong Kong, Mumbai, Och-Ziff Consulting (Beijing) Company Limited, and Dubai.  So with one investment we get a global reach, diversification and a team investing along side of us.

With a pipeline we have solid assets in the ground paying out cash.  But  a management company is a service company.  Our returns come from assets under management (Aum).  

As long as Aum increases we should see greater growth, currently $40.6 billion in assets under management.  When those assets begin to shrink we should not hesitate to bail out.

Sunday, January 5, 2014

Och-Ziff history

Dan Och working for Goldman Sac (11 years), took the Ziff Bros (Car and Driver) clients off and started a hedge fund (1994).   They are now one of the oldest and largest Wall Street Hedge Funds.  They always had to worry that the Brothers would take off and the whole thing would fall apart.  About 13 years in, the Partners had a lot of equity in the firm and wanted to go try their own ideas in other countries.

They sold their economic interest to public investors at twice todays prices.  In a sense they cashed-in.  The funds that they received they put into the current and new Oz funds that they had ideas to run.  As investors in the funds they made out as fund owners.  Carry from the other investors funds, went up to OZm which covered the back-end costs and distributed profits to shareholders which as you can see from insider acquisitions included the partners and employees, as well as public shareholders.  

When Rockefeller created a standard oil company he did not want any of the parts making profits.  They all joined the octopus, upstream, midstream and downstream.  All of profits went to the top and everyone with Standard oil shares got the same dividend.  So here the partners took the money from the public offering and ran separate funds.  All of the management fees go to the top which they share with public shareholders who put up the capital to get them free.  The funds that they run bring in more capital, fees from this capital also goes to the top.

If you read the history of Hedge funds that I posted earlier you can see how it evolved from a long/short theory, to managing A. W. Jones’s own funds.  Later he was managing money managers in house, then it evolved into managing other funds.  His deal became a fund of funds.  One big fund made up of smaller funds, managing the risk between them based on the suspected view of the future.   

We see the same thing here.  The original partners took their money out and were given B-shares that had voting rights but no economic rights.  They took their own funds, invested in their own funds under the Ozm umbrella.  The funds have to have a billion dollars under management to cover cost of running a fund and its offices, regulatory responsibilities, etc.  The management company decides where the new cash flows from incoming funds go.

Saturday, January 4, 2014

$40.6 billion AUM

The estimated unaudited amount of assets under management is approximately $40.6 billion, which reflects a net increase of approximately $1.4 billion last month.
  December 2013
Estimate (1)(2)
    December  2013

OZ Master Fund
OZ Europe Master Fund
OZ Asia Master Fund

Buy owner-managers who want their stock to go up for solid reasons. 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. 

The distributions reflect the performance of the year prior. The big dividend is always the last dividend, declared at the end of the year and paid in February. It’s also a simple business. Gather assets, get paid. Invest well, get paid. There is little mystery here. It generates a lot of cash and has little need to reinvest that cash in the business.

Commentary on prospectus summery.

• 0zm

Hedge Funds went public to go closed-end, to give themselves a pool of “permanent capital.” The money investors paid the partners for the shares was used by the Partners to invest in Oz’s Hedge funds, to monetize equity interest. This they could take out later like any Investor in the Funds.

You understand now how the partners are compensated with restrictions. They might give you a $hundred million, but it is spread out across four years, and you can’t go anywhere. That new guy probably had to sell half, just to pay his taxes on the distribution.

The stock originally crashed because the Summer of 2007 was not the best time to go public. The collapse of the Bear Stearns hedge funds and worries about higher taxes depressed valuations in the whole alternative investment sector. 

July 2007: New-York based Och-Ziff Capital Management Group announced it was planning an IPO on NYSE that could raise around $2 billion, saying it planned to use the IPO proceeds to expand abroad in search of new strategies and investors. As the group planned to sell shares to the public as a partnership, it would not be subject to federal income tax, and also will not have to provide the same level of disclosure as most other publicly traded companies.

The media reflected that the IPO would allow investors to profit from its investment advisory fees and incentive compensation rather than its funds. Moreover, these public offerings can also benefit investors by offering them yet a different way of getting a piece of the “hedge fund action.” Investors who wish to share in some of the gains (as well as losses) of publicly offered hedge fund managers would be able to do so without the high minimums, fees, and long lock-up periods that would typically be required to invest in the manager’s hedge funds.

The hedge fund industry has continued to see increased asset flows in recent years, capital inflows have been concentrated largely into funds with more than $1 billion under management. As a benchmark a lot of them were being valued at 30% of AUM when they went public.

Prospectus Summary

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our Class A shares. You should read this entire prospectus carefully, especially the risks of investing in our Class A shares discussed under “Risk Factors” beginning on page 27, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus before making an investment decision.

We are a leading international, institutional alternative asset management firm and one of the largest alternative asset managers in the world, with approximately $26.8 billion of assets under management for over 700 fund investors as of April 30, 2007. We have a strong track record spanning over 13 years, which places us among the longest standing alternative asset managers globally.

We were founded in 1994 by Daniel Och, together with the Ziffs, with the goal of building a world class investment management business. Prior to founding our company, Mr. Och spent over 11 years at Goldman, Sachs & Co. Mr. Och instilled the team-based culture he experienced at Goldman Sachs into our firm, and this approach has helped us become a leader in the alternative asset management industry. Today, we have over 300 personnel, with over 125 investment professionals, including 18 partners, located in our New York headquarters and offices in London, Hong Kong, Tokyo and Bangalore. We have been a leader in international expansion in our industry and expect to further expand by opening an office in Beijing later this year.

We seek to deliver consistent positive, risk-adjusted returns throughout market cycles, with a focus on risk management and capital preservation. Our diversified, multi-strategy approach combines global investment strategies, including merger arbitrage, convertible arbitrage, equity restructuring, credit and distressed credit investments, private equity and real estate. We base our investment decisions on detailed, research-based, bottom-up analysis, and our investment philosophy focuses on opportunities for long-term value. Our investment processes are designed to incorporate risk management into every investment decision: our portfolio managers meet with analysts daily to review the risks related to their positions and the inherent risks associated with these positions, and we have a risk management committee that conducts regular oversight of portfolio risk. Risk management has been a core foundation of our business since inception and remains a critical part of our investment process today.

We manage and operate our business with a global perspective, looking to take advantage of investment opportunities wherever they arise. We have been among the pioneers in building out a global alternative investment platform, enabling our teams in the United States, Europe and Asia to share ideas and analysis across geographic regions and investment strategies.

We believe our deeply embedded, team-based culture differentiates us from our competitors. We currently have 18 partners and 27 managing directors, all of whom derive virtually all of their income payments from participation in the profits of our entire business. Our compensation system helps minimize the potential for asymmetric risk profiles between fund investors and our partners and employees and fosters a strong culture of internal cooperation and sharing of ideas. Additionally, all of our professional employees have the opportunity to eventually become managing directors and partners, providing a compelling incentive and retention mechanism. We have historically experienced very little employee turnover, and believe that, as a result of this culture, we have been particularly successful in attracting and retaining some of the leading investment and business talent in the industry.

Wednesday, January 1, 2014

Assets Under Management (AUM) .Estimate as of January 1, 2014.

Founded in 1994 by Daniel S. Och, Och-Ziff Capital Management Group is one of the largest institutional alternative asset managers in the world, with approximately $40.6 billion in assets under management as of January 1, 2014.

OZ the business

What they did in 2008 honoring all withdrawals when others wouldn’t, is what gives OZM the edge now in attracting more money.

With the insiders carrying that much interest in the performance, I can easily see it taking out the next two highs.  The driving force is the increasing AUM.  Most of the new big money coming in is going to the biggest firms as can be heard from the conferences, and backed up online.  Aum goes up, profits go up, relative costs go down, and the evaluation of what those payouts are worth goes up.  

I just don’t want to left out of something I suspected many years ago.  I could hear it between the lines when Mark Mobius taught us, most clearly on that seminar he did in New Zealand a few years ago.  How his private clients has access to things that small investors could not play.

More clearly when congress attacked carried interest, which is the same advantage Kmr has,  carrying the gains forward free of ordinary tax. Pushing the capital gain ahead.

We know why it bottomed in 08, it was probably the Emerging Markets that pulled it up in 09.  In theory the way these LLC pay out all the profit every quarter you would think they could make Investors happy just going sideways.  But something gave Oz a shove in 2013.  Smaller funds may gain market share from the new loosening of restraints on advertising.  But it does not matter for the big players.  Big players have to use big funds to be prudent in an unprudent world.

As the Banks are being kicked out of the game by the Volker rule, Hedge funds, the big Hedge funds will pick up the slack.  Private clients going through Private banks and Pension funds.  Hedge funds that invest in hedge funds (Fund of funds).  China using Ozm as a porthole.

Trillions of dollars are coming this way and we stand to get a percent of that.  Congress threw in the towel on harassing carried interest because Law firms do it and they are all Lawyers.

Simple business, easy to understand, moat around it.  May not be around as long as pipelines, but is having its day now.