Och-Ziff's Flagship Fund Falls Below $10 Billion on Outflows

(Bloomberg) -- Och-Ziff Capital Management Group Inc. posted another quarter of outflows from its multi-strategy hedge fund, a signal that efforts to pull in capital have yet to pay off.

The firm’s flagship fund suffered second-quarter withdrawals of $849 million, bringing assets below $10 billion for the first time in years. A portion of those outflows were from former executives.

Still, the firm founded by billionaire Dan Och drew in about $1.1 billion in the period due to institutional credit strategies, which invest in collateralized loan obligations. Those lured about $1.5 billion, the company said in a statement Friday.

The firm’s shift towards lower-fee products has offset an asset bleed from Och-Ziff’s hedge funds that has persisted since 2014, when the company first disclosed a regulatory probe that triggered an exodus of client cash and a slide in its stock price.

In the intervening years, Och-Ziff grappled with the fallout of settling the investigation and as well as changes to its succession plan and executive departures. The firm has focused on shrinking or shuttering non-core businesses while improving the performance of the flagship. It has gained 11% this year through July, beating hedge fund peers.

Fee Structure

“I know I sound like a broken record on these calls, but the truth is I think it’s an excellent product,” Chief Executive Officer Robert Shafir said on a conference call Friday about the flagship fund. “We are having much more productive conversations with our clients regarding our product offering here. When that crystallizes it’s hard for me to say, but we’re betting on the long term success of that product and I think we’re going to be right.”

Total firm assets stood at $33.2 billion as of August 1.

Och-Ziff reported distributable earnings of 48 cents a share in the second quarter, beating estimates. That compares with 34 cents a year earlier. The stock rose 2.2% to $23.60 as of 10:11 a.m. in New York.

The flagship hedge fund provides the bulk of Och-Ziff’s revenue due to its higher fees. In the first quarter, Och-Ziff charged an average management fee of 1.32% on its multi-strategy fund, while charging 0.47% to manage CLO assets. As a result, the firm’s overall second-quarter income from management and incentive fees was about $92.3 million, 8% lower than a year earlier.

Och-Ziff may see a turnaround in the coming months. In June, regulators lifted a punitive sanction that was imposed on the firm three years ago after a multiyear investigation into bribery in Africa. The waiver removed a restriction that inhibited Och-Ziff’s ability to raise money for its hedge funds through a private placement.

“While there have still been other channels open and available, this is notable in that most bank platforms have been either unable or unwilling to work around the increased regulatory hurdles,” Jefferies Group LLC analysts led by Gerald O’Hara wrote in a July 2 report. “With strong performance and continued management stability, consultants and gatekeepers should become increasingly positive into year-end.”

This year, the firm’s shares have rallied 150% in part by changing the compensation structure for some executives and converting to a corporation from a partnership. That enabled Och-Ziff to be added to the Russell 2000 Growth Index.

Also as part of the changes, the firm’s former executives -- including Och -- withdrew their capital from the flagship. About 40% of those outflows in the second quarter were from former managers, the filing showed.

To contact the reporter on this story: Katia Porzecanski in New York at kporzecansk1@bloomberg.net

To contact the editors responsible for this story: Alan Mirabella at amirabella@bloomberg.net, Vincent Bielski

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