Finance

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

They say the wheels of justice grind slowly, and no one knows that better these days than Dan Och.

The wheels of a government bribery investigation into his hedge fund firm Och-Ziff Management have been grinding all over the company's stock ...

Decimated
Och-Ziff's share price has plunged about 90 percent from its 2007 IPO price
Source: Bloomberg

... as well as the amount of assets the firm has under management:  

Pain in the Assets
Och-Ziff's assets under management shrunk to less than $40 billion at the start of August
Source: Bloomberg data, company presentation

An investigation into the company's dealings in Africa has been going on for at least five years, and some of the continent's most notorious figures -- from Muammar Qaddafi to Robert Mugabe -- have been  associated with the probe. (If you're unfamiliar, here's a great profile of the colorful, cigar-puffing dealmaker Jean-Yves Ollivier, who helped Och-Ziff grease the wheels with an oil investment in the Republic of Congo.)

The shares rallied into double-digits on Tuesday, impressive in an otherwise down market, amid hopes that there is finally light at the end of the tunnel. The firm reserved $214.3 million for the probe in the second quarter, bringing the total for the anticipated settlement to $414.3 million, as Katia Porzecanski reported. Executives on the conference call  indicated that this should be enough to cover the settlement. The firm also put former U.S. Attorney General William Barr on its board, presumably someone who will help rehabilitate the firm's reputation for complying with pesky rules governing how to do business with some of the world's most notorious strongmen.   

Still, this isn't the first time it's looked as if there was light at the end of the tunnel. CFO Joel Frank told analysts last year that he hoped the investigation would be over by the end of 2015. And even when it is, Och-Ziff must still confront many other questions.


First off, its plan to pay for the settlement: 

Certain of Och-Ziff ’s executive managing directors are in discussions to commit up to $500 million to the Company through the purchase of perpetual preferred units. The proceeds of the potential financing transaction would be used to fund the investigation-related monetary settlement and for general corporate purposes. The units are expected to have a dividend rate of 0% initially for three years, which would increase over time, and are not convertible into Class A Shares.

There are two ways  to view this plan, depending on one's inclinations toward skepticism: No. 1: It's encouraging that the company's executives have the confidence to make a big investment. No. 2: Only this company's executives would go anywhere near an offering like that.   

In addition, this capital raising is being announced with few details. How many executives are putting up money, and who are they? What happens to that dividend after three years? Is this a permanent or temporary part of the capital structure? 

The details of the perpetual preferred units are still being negotiated, so those questions will have to wait. So will the details of the government's account of what exactly happened with Och-Ziff in Africa and how much reputational risk is involved.

Still, there's an arguably even bigger challenge facing the firm, regardless of the outcome of the bribery investigation. Hedge funds are leaking assets at a startling pace as lagging performance is leading to an almost existential crisis for the industry. The three consecutive quarterly outflows through the first half of this year marked the longest stretch of withdrawals since 2009, as Bloomberg Intelligence pointed out. Fortress Investment Group, the alternative-asset manager that preceded Och-Ziff in going public in 2007, closed its macro hedge fund business this year. 

Och-Ziff's main challenge, once the investigation is behind it, will be reversing some mediocre performance. Its OZ Master Fund lost 1.7 percent through the end of July as poor performance in its long-short equity portfolio overshadowed gains in credit strategies. Asian and European funds also declined in the period. The stereotype often made is that there is a bit of a Catch-22 associated with hedge funds: strong performance brings in tons of assets, but tons of assets make strong performance much more difficult. It makes you wonder whether Och-Ziff's dangerous dealings in Africa are a symptom of that phenomenon.  

As such, the shares of Och-Ziff themselves may be a fun vehicle for traders who are following each episode of the soap opera that the company has become. As for buy-and-hold investors, well, it's probably still a good time to register caution.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net