Och-Ziff Net Income Drops 94% as Performance Fees Decline

Och-Ziff Capital Management Group LLC, the hedge fund run by Daniel Och, reported a 94 percent drop in fourth-quarter profit on lower performance fees as most of the firm’s funds lost money in 2011.

Distributable profit, a measure excluding costs related to Och-Ziff’s 2007 initial public offering, fell to $16.8 million, or 4 cents a share, from $303.1 million, or 74 cents, a year earlier, the New York-based company said today in a statement. Earnings beat the 2-cent average estimate of eight analysts in a Bloomberg survey.

Performance fees shrank by 90 percent as Europe’s sovereign-debt crisis roiled markets. Three of the firm’s four funds declined last year, led by a 4.9 percent loss for the European fund. Market gains since the start of the year helped offset $300 million in redemptions, the firm said.

“Heading into the quarter, the set up for 2012 was earnings power and building back up that performance,” said Daniel Fannon, a Jefferies & Co. analyst based in San Francisco, who recommends investors buy the stock. “The outlook is one where we still expect a fair amount of growth in 2012.”

Investors redeemed a net $38 million in the fourth quarter, shrinking assets under management to $28.8 billion. Estimated assets were $29 billion as of Feb. 1, reflecting $500 million in performance-related appreciation as the Standard & Poor’s 500 Index climbed 4.4 percent in January.

Europe Funds

Och-Ziff rose 0.7 percent to close at $10.26 in New York trading. The firm’s shares have increased 22 percent this year after falling 46 percent in 2011.

The company sold 33.3 million shares at $7.50 each on Nov. 17, a 19 percent discount from the closing price the day before the firm said it would sell the stock to repay a portion of a $622 million term loan that matures in July. Och said in December the hedge fund may have sold the stake too cheaply.

The OZ Master Fund, the firm’s biggest, gained 0.1 percent last quarter, while the OZ Europe Master Fund fell 1.5 percent. Och-Ziff doesn’t own a significant amount of Greece’s sovereign debt and hasn’t taken part in restructuring talks, the firm said last month in response to “media reports regarding the company’s involvement.”

Och said in May that the firm started a European Ucits fund in April, which means it complies with a European directive known as Undertakings for Collective Investment in Transferable Securities. Ucits funds place restrictions on leverage, offer investors transparency of holdings similar to that of mutual funds and allow clients to withdraw money in as little as a day.

January Gains

The OZ Global Special Investments Master Fund increased 0.5 percent in the fourth quarter, while the OZ Asia Master Fund declined 0.2 percent.

“Last year was particularly volatile, characterized by the most difficult market conditions since 2008,” Och, 51, said in the statement.

The firm’s four funds all gained in January, with the OZ Master Fund up an estimated 1.6 percent, the OZ Europe Master Fund climbing 1.9 percent, the OZ Asia Master Fund advancing 2.6 percent and the OZ Special Investments Master Fund increasing 1.3 percent.

Och said the firm invested about 15 percent of the $4.4 billion in 2011 gross deposits, or $660 million, in credit- related strategies. The percentage of cash Och-Ziff holds fell to 21 percent last quarter from 25 percent in the third quarter as the firm increased investments.

High Watermark

“Dislocations were creating significant investment opportunities, particularly in distressed credit, structured credit and equity long-short and that’s continued,” Och said today on a conference call with analysts.

The OZ Master Fund surpassed its so-called high watermark, or previous peak value, in January. It had fallen below that level at the end of last year, which meant the firm was unable to charge performance fees until it recouped losses.

Och-Ziff’s distributable earnings don’t comply with generally accepted accounting principles. The firm reported a net loss of $137 million, or $1.17 a share, compared with a loss of $22.8 million, or 24 cents, a year earlier. Och-Ziff has said costs associated with the IPO will cause net losses through 2012.

Och, a former Goldman Sachs Group Inc. trader, left the firm in 1994 to start a hedge fund for Ziff Brothers Investments LLC, which managed the Ziff family’s publishing fortune. He oversaw money solely for the Ziffs for five years and then opened his fund to outside investors in 1999.

To contact the reporter on this story: Kelly Bit in New York at kbit@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.