July 2 (Bloomberg) -- Och-Ziff Capital Management Group LLC, the investment firm run by former Goldman Sachs Group Inc. trader Daniel Och, filed to raise $2 billion in the largest initial public offering by a U.S. hedge-fund manager.

Och, 46, and his 17 partners will reinvest proceeds from the IPO in their funds for five years, according to a regulatory filing today. The New York-based company will borrow $750 million that will be paid to Och and other owners before the share sale.

The company, founded in 1994 with money from the Ziff media empire, follows Fortress Investment Group LLC and Blackstone Group LP, which manage buyout and hedge funds, in seeking to raise capital and pay off existing owners by issuing shares. Its earnings more than doubled to $588 million in 2006 while client assets have surged 42 percent a year to $26.8 billion since the end of 2002.

``Och-Ziff is one of the best names in the market, and the reinvestment provision is a great sign of commitment from the managers toward their own product,'' Mathieu Klein, chief executive officer of Paris-based investment adviser Darius Capital Partners, said today in an interview.

The firm plans to organize as a partnership, which would allow income to flow directly to shareholders without an additional layer of corporate taxes. These investors could pay taxes as low as the 15 percent capital-gains rate. Blackstone's IPO boosted efforts by lawmakers to propose bills that would require some hedge-fund managers and most private-equity firms to pay tax rates as high as 35 percent.

Avoiding Criticism

The firm's decision to lock in IPO proceeds for five years could help the firm avoid criticism about ``cashing out'' the way Blackstone co-founder Stephen Schwarzman did, said Steven Howard, a partner in New York law firm Thacher Proffitt & Wood LLP who advises hedge-fund and private-equity firms.

``Och-Ziff is wise for addressing that prominently,'' said Howard, who hasn't been involved in either firm's offering. A lockup of IPO proceeds ``also is helpful in terms of what may be coming down the pike with taxation. Och-Ziff could argue for capital-gains treatment because they've got their own money at risk, and for a long period of time.''

Still, the firm's owners would get cash payouts from the $750 million loan, Howard said.

Price Not Disclosed

Och-Ziff posted profits of $85.2 million for the quarter ended March 31, an 86 percent increase from a year earlier. For all of 2006, revenue almost doubled to $1 billion, the filing shows.

The number of shares and the price for the offering weren't disclosed in the filing with the U.S. Securities and Exchange Commission. Och-Ziff said the $2 billion IPO valuation was an estimate made for calculating the registration fee.

Och-Ziff will have two classes of shares after the offering. Class A stock will be publicly traded, while Daniel Och will control all votes of the Class B shares. Through those votes, Och will have the power initially to appoint five of seven members of the firm's board of directors. He retains approval rights to certain board actions, including changes of control of the firm, the filing shows.

IPO Trend

New York-based Blackstone raised $4.75 billion last month in the biggest U.S. IPO in five years. That followed the February IPO of New York-based Fortress, which gathered $634 million as the first U.S. manager of private-equity and hedge funds to go public.

GLG Partners LP, Europe's third-largest hedge-fund manager, said June 25 it will go public in the U.S. through a $3.4 billion transaction known as a reverse merger. GLG will sell a minority stake to New York-based Freedom Acquisition Holdings Inc., a publicly traded investment company, creating GLG Partners Inc. that will trade on the New York Stock Exchange.

Third Point LLC, a New York-based hedge-fund firm founded in 1995 by Daniel S. Loeb, 45, said June 14 it plans to raise $666 million in an IPO for a fund that will trade on the London Stock Exchange beginning July 18. Third Point manages $5.1 billion. Net proceeds from the sale will be reinvested in the fund.

Tax Issue

Senate Finance Committee Chairman Max Baucus, a Montana Democrat, and Charles Grassley, an Iowa Republican, introduced a bill to stop investment firms, when they become a publicly traded partnership, from using the law allowing them to pay lower taxes if they derive 90 percent of their profits from passive investments.

The House of Representatives is considering a bill, broader than the Senate measure and backed by top Democrats, that would more than double the tax on ``carried interest,'' which is profit that managers receive for investment services. That would raise their levies as high as 35 percent, plus an additional 3 percent Medicare tax.

``These hedge funds are saying the tax discussion isn't concerning us right now,'' Klein said.

Och-Ziff was founded in 1994 by Och and Ziff Brothers Investments LLC. Its flagship OZ Master Fund, with about $17 billion in assets, has averaged returns of 17 percent a year since it started in April 1994, compared with 11.6 percent by the Standard & Poor's 500 Index.

Och previously spent more than 11 years at Goldman Sachs, where he worked on the famed arbitrage desk run by Robert Rubin. Rubin later became U.S. Treasury secretary under President Bill Clinton and is now chairman of the executive committee at Citigroup Inc.

Multistrategy Fund

Och-Ziff's main fund makes bets in a wide variety of securities and industries, including stocks of merging companies, convertible bonds, stocks and bonds of distressed companies, private equity and real estate.

The firm has more than 125 investment professionals in offices in New York, London, Hong Kong, Tokyo and Bangalore, and plans to open an office in Beijing later this year, according to today's filing.

Assets managed by hedge funds globally have more than doubled over the past five years to almost $1.6 trillion as of the first quarter of 2007, according to Chicago-based Hedge Fund Research Inc. Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested.

Each Och-Ziff employee will receive stock in the firm that will vest over a four-year period.

Daniel Och declined through a spokesman to comment on the offering, citing securities rules surrounding new offerings.

Goldman Sachs and Lehman Brothers Holdings Inc. are managing the sale. The company plans to list on the New York Stock Exchange under the ticker OZM.

Och-Ziff was advised in its offering by New York-based law firm Skadden Arps Slate Meagher & Flom LLP.

To contact the reporters on this story: Elizabeth Hester in New York at ehester@bloomberg.net; Jenny Strasburg in New York at jstrasburg@bloomberg.net.

Last Updated: July 2, 2007 17:50 EDT