Sunday, January 5, 2014
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.