Dan Och Plays It Safe
His Och-Ziff hedge fund, up 23 percent in 2009, is scaling back risk to attract big investors. His share price is languishing.
Daniel Och, founder of $25 billion hedge fund firm Och-Ziff Capital Management Group LLC, looks out from the podium over the crowd of investors and money managers nibbling on chicken salad at Manhattan’s St. Regis hotel and repeats a quip from investor Warren Buffett.
“Only when the tide goes out will we see who’s wearing their bathing suit,” he tells attendees at the lunch, part of a June investor conference organized by New York-based investment bank Keefe, Bruyette & Woods Inc.
Though he misquotes Buffett (who actually said “Only when the tide goes out do you discover who’s been swimming naked”), Och’s point is clear, Bloomberg Markets reports in its September issue. When markets crashed in 2007 and 2008, only a few large hedge funds successfully protected themselves from big losses, and Och-Ziff was one of them, Och says.
He tells the gathered asset managers that Och-Ziff has a history as a safe haven for institutional money. At one point, he sounds more like a retail banker touting a certificate of deposit than a hedge fund manager.
“The power of compounding is powerful,” Och says.
“Getting money from institutional investors is key for hedge funds,” she says. And in the wake of the market crash, pension funds, endowments and other institutions want more accountability. “Institutions are now demanding greater reporting and more transparency,” Bensted says.
Och, 49, a Goldman Sachs Group Inc. alumnus who sports a mop of red hair, needs new institutional money more than most hedge fund managers, says Robert Lee, an analyst at KBW. Och- Ziff is the only publicly traded U.S.-based hedge fund firm, and as of July 30, shares of the company had plunged 57 percent since they were listed on the New York Stock Exchange in November 2007. They’re flat this year, at $13.74, as of July 30.
The shares are languishing even though the return of the firm’s flagship OZ Master Fund, which holds 73 percent of its assets, was up 23 percent in 2009 after a 16 percent drop in 2008.
$8 Billion in Redemptions
For the shares to climb, Och, who declined to be interviewed for this story, needs to grow the firm’s asset base, Lee says. Och-Ziff’s flagship fund was hit by $8 billion in redemptions last year, which helped reduce its assets to $23 billion at the end of 2009 from a peak of $33.8 billion in June 2008, according to company filings.
“To get the share price up, you need both a bigger asset base and greater earnings growth from performance,” Lee says. “You can’t just count on performance.”
Last year, the firm charged an average management fee of 1.7 percent plus 20 percent of profits. Ten billion dollars in new investment thus represents an extra $170 million in management fees.
So far, Och’s fundraising pitch has succeeded. In the first quarter of this year, investors poured $2.5 billion into Och- Ziff.
Och-Ziff is known for consistent returns of 10 to 20 percent, after fees, and for successfully hedging its risks.
“Reliable and steady performers are hard to come by,” says Michael Rosen, chief investment officer of Santa Monica, California-based hedge-fund consulting firm Angeles Investment Advisors LLC. He advised his clients to stick with Och-Ziff after the firm allowed him to monitor its response to the October 2008 market meltdown from its New York offices.
“We’d be surprised if they’d be one of the best performers among hedge funds, because that would mean they took enormous risks,” Rosen says.
Och has benefited from a movement of institutional money into bigger hedge funds. In the first quarter of 2010, funds with assets in excess of $5 billion controlled 62 percent of all hedge fund assets, up from 57 percent at the end of 2008, according to Chicago-based Hedge Fund Research Inc., which tracks the industry.
Elephants with Elephants
“Elephants like to dance with elephants, not mice,” says Daniel Celeghin, a partner at Darien, Connecticut-based management consulting firm Casey, Quirk & Associates LLC. “Large investors want to deal with large institutions.”
Och’s play-it-safe attitude will push away some individual investors, says Peter Rup, chief investment officer at Artemis Wealth Advisors LLC, a New York-based firm that allocates money to hedge funds for clients.
“When hedge fund managers get more interested in building an institution instead of maximizing returns, I get nervous,” Rup says. “Institutional investors are more interested in capital preservation than in seeing a hedge fund manager knock the lights out.”
Dan Och’s 16-year run has made him a multibillionaire; he made an estimated $1.1 billion just from the initial public offering of his firm and from selling shares to Dubai’s sovereign wealth fund, according to regulatory filings.
He runs his funds from 39th-floor offices at 9 W. 57th St. in midtown Manhattan, an iconic building that features a ski- jump facade and has a 10-foot (3-meters), 3-ton, red numeral 9 standing in front. His neighbors in the building include hedge fund Highbridge Capital Management LLC and private-equity firm KKR & Co.
Och goes home to a penthouse at 15 Central Park West, a condominium tower that also houses rock star Sting and Goldman Sachs CEO Lloyd Blankfein. Och’s apartment is valued at $38 million, according to a filing with the New York City Department of Finance.
Och’s continued success depends on the goodwill of investors such as the California Public Employees’ Retirement System, or Calpers. After Joseph Dear took over as Calpers’s chief investment officer in January 2009, he demanded more reporting from hedge fund managers. Och-Ziff complied, Dear says.
Calpers a Happy Investor
“They are still managing money for us, and we are pleased to be partners with them,” he says. In 2009, Calpers had more than $500 million invested with Och-Ziff.
Investors in Och-Ziff’s stock have less reason to be pleased. The shares fell from their IPO price of $32 to as little as $3.98 in November 2008.
Och bought 1.6 million shares for his own account from November 2008 to March 2009 at prices ranging from $3.98 to $5, according to regulatory filings, which earned him about $14 million in profit.
Still, Och-Ziff has done better than other publicly traded alternative-investment firms. The stock of private-equity giant Blackstone Group LP has declined 64 percent as of July 30 since the firm listed itself in June 2007, while Fortress Investment Group LLC has fallen 81 percent since its February 2007 listing.
“There was a lot of interest in alternative-asset managers back then,” says Sol Waksman, president of Fairfield, Iowa- based BarclayHedge Ltd., which tracks and invests in hedge funds. “Investors overpaid.”
The latest alternative-investment firm to list in the U.S. is New York-based KKR, which shifted its stock from the Amsterdam Stock Exchanges to the New York Stock Exchange on July 15. In its first two and a half weeks on the NYSE, the stock dropped 14 percent.
Och runs a multi-strategy hedge fund firm. The flagship OZ Master Fund, with $18 billion, bets on the rise and fall of stocks, invests in distressed assets and does merger, or risk, arbitrage -- shorting the stock of companies likely to make acquisitions and buying the stock of their targets. It also loans money to buyout firms.
Some 25 percent of Och-Ziff’s assets come from pension funds, 21 percent from funds of hedge funds, 17 percent from foundations and endowments and the rest from corporations, private banks and family offices, according to the company’s reports to stockholders.
Och, Partners Stake
Och and his 15 partners own 10 percent of the assets in the firm’s funds, valued at about $2.5 billion.
Och, who has a finance degree from the Wharton School of the University of Pennsylvania, started as a risk arbitrage trader for Goldman Sachs in 1982 in a department led by future Treasury Secretary Robert Rubin. The desk bet the bank’s money on which mergers would succeed and which would fail or be blocked.
As Och rose at Goldman -- he eventually became co-head of U.S. equity trading -- he watched colleagues leave to found hedge funds. Among them: Thomas Steyer, who started Farallon Capital Management Partners, and Edward Lampert, now head of ESL Investments Inc., which owns KMart and Sears.
Och himself left Goldman in 1994 to start a hedge fund for Ziff Brothers Investments LLC, which managed the Ziff family’s publishing fortune. Ziff-Davis Inc., publisher of computer and technology magazines and websites, was acquired by CNET Networks Inc. in 2000.
$100 Million Startup
Dirk Ziff, eldest son of Ziff-Davis founder William Ziff, met Och while an intern at Goldman. Daniel Stern, Ziff Brothers’ president, gave Och $100 million to invest in return for 10 percent of what became Och-Ziff.
One proviso was that he couldn’t raise outside funding for five years. When the five years ended, in 1999, Och started seeking new investors and by 2002 had $5.8 billion under management, according to company filings.
“He has a huge desire to win all the time,” Stern says, adding that Och’s goal was to found an institution that rivaled Goldman’s risk arbitrage operation.
From 2002 until the firm’s 2007 IPO, the flagship OZ Master Fund generated a net annualized return after fees of 13.9 percent, according to documents filed with the Securities and Exchange Commission.
Dubai Buys In
As Och-Ziff assets grew to $30 billion in 2007 from $5.8 billion in 2002, Och decided to go public. In the Nov. 13, 2007, IPO, the firm sold 36 million Class A shares to the public at $32 each. It sold another 38.1 million shares to Dubai International Capital LLC, the emirate’s sovereign wealth fund, which paid $1.26 billion for 9.9 percent of the firm. DIC, which is Och-Ziff’s biggest outside investor, has held onto the stake despite a loss of more than 50 percent.
DIC’s CEO, Samir Al Ansari, left his position in January and now heads a Gulf investment bank.
Och went public when the Standard & Poor’s 500 Index, at 1,439, was near its all-time high. A year later, the S&P 500 had fallen 39 percent and his firm was bleeding assets as desperate investors pulled out their money to make margin calls.
“We did not gate, lock up or suspend redemptions,” Och told his audience at the St. Regis. “We didn’t change liquidity terms on one dollar of any investor’s capital.”
OZ Master’s 16 percent loss in 2008 beat the 18 percent average loss for the hedge fund industry -- and handily beat the S&P. By the first quarter of 2009, Och-Ziff funds were 30 percent in cash, Och told investors in a May speech in London organized by Barclays Plc. The cash pile allowed Och to snap up bargains.
“We bought convertible bonds from funds that were frozen,” Och said. “We bought leveraged loans from funds that were frozen.”
He also bought, at a heavy discount, commercial and residential mortgage-backed securities of the kind that triggered the market crash.
Those bets accounted for much of OZ Master’s 23 percent return in 2009. That may be a high point, says Byron Wien, vice chairman of Blackstone Group’s advisory services division. He says that big hedge funds, given their new conservative bent, are more likely to return 10 percent than 20 percent.
That’s fine with Stewart Massey, who runs Massey, Quick & Co., a consulting firm in Morristown, New Jersey, that caters to endowments and foundations. He notes that in May, during the crisis triggered by fears of a European debt default, the S&P 500 fell 11 percent, while OZ Master lost just 1.7 percent.
“May was a reminder that people should make a healthy allocation to funds that preserve capital,” Stewart says.
Dan Och says his firm should be their first choice.
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