Och-Ziff Suffered $13 Billion in Withdrawals as Clients Fled

  • Redemptions over the last 13 months came amid settlement
  • Resolved five-year bribery probe in September with regulators

Och-Ziff Capital Management Group LLC, one of the world’s biggest hedge fund firms, suffered withdrawals of about $13 billion over the last 13 months as the company settled a five-year bribery probe and saw its founder Dan Och singled out by regulators for ignoring red flags and corruption risks.

Clients pulled about $8 billion in 2016 and an additional $4.8 billion in January through Feb. 1, with redemptions concentrated in the multistrategy funds, the company said Wednesday in a statement. Some of the asset declines were offset with performance gains, including a 3.8 percent return for its biggest multistrategy fund last year. Assets under management for the firm decreased to $33.6 billion as of Feb. 1 from $43.7 billion a year earlier.

“We have come through a challenging year,” Och said Wednesday on a conference call. “The investigation and resulting settlement obviously had an impact on outflows, but we believe the worst quarter is behind us. That is not to say we won’t experience additional outflows, however, the tone of investor conversations over the past few months has changed for the better. Investors are pleased with our recent performance and to have the investigation behind us.”

Lower Redemptions

The New York-based firm said in November that it expected fourth-quarter redemptions to be higher than usual because of the settlement and the general exodus of institutional investors from hedge funds. Pensions for Rhode Island, New Jersey and Goldman Sachs Group Inc. are among those that trimmed or exited their investments in Och-Ziff last year. The hedge fund firm also saw its bond rating cut to junk on the back of the withdrawals and a reduction in management fees for clients to an average of 1.01 percent from 1.23 percent.

The publicly-traded investment firm lost almost half its value in the stock market in each of the last two years. The shares fell 5.8 percent at 10:29 a.m. Wednesday to $3.42.

In its earnings report today, Och-Ziff reported distributable earnings of $7.5 million, or 1 cent a share, in the quarter compared to a loss of $36.1 million, or 7 cents, a year earlier. For the full year, the loss was $121.3 million compared with a profit of $251.9 million in 2015.

The combination of lower assets and revenue led to an unexpectedly high leverage ratio for Och-Ziff, which could see another ratings downgrade this year if outflows continue and its debt ratio edges higher, S&P Global Ratings said Jan. 5.

Election Effect

Och said today that he named David Windreich and James Levin co-chief investment officers. Windreich is head of U.S. and European investing, while Levin oversees credit.

Och said the firm’s investment performance benefited from positions taken after the U.S. presidential election in November, which he called the “seminal event of the quarter.” The hedge fund firm increased its bets on financial and energy assets, and boosted short positions in consumer staples and utilities, he said on Wednesday’s call. Going forward, Trump’s expected policy changes will aid Och-Ziff’s merger arbitrage as well as long-short equity strategies, he said.

Och-Ziff’s settlement with the U.S. Justice Department, which included a $213 million criminal penalty, deferred prosecution for three years in exchange for cooperation and good behavior. In a separate accord with the Securities and Exchange Commission, Och-Ziff agreed to pay about $199 million to settle a parallel investigation alleging its executives ignored warnings from legal counsel and permitted illicit transactions to proceed. Its OZ Africa Management GP unit pleaded guilty to conspiring to bribe officials of the Democratic Republic of Congo.

Och personally paid a fine of nearly $2.2 million. According to the SEC, he approved funding two transactions in which bribes were paid. Those bribes were then recorded as investments or loans, the agency said. Though the SEC said Och didn’t know about the bribes, the firm acknowledged it failed to accurately reflect how assets were used and didn’t have adequate internal controls.

The company’s chief financial officer, Joel Frank, stepped down last year along with Chief Legal Officer David Becker after the probe was settled. Och-Ziff named Alesia Haas and David Levine as their replacements, respectively.

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