The main multistrategy hedge funds managed by Daniel Och’s Och-Ziff Capital Management Group have more or less held their own over the past year or so. The publicly traded company’s stock is a different story.
The New York firm’s flagship multistrategy fund, OZ Master Fund, lost about 4.1 percent in the first two months of 2016, while its OZ Asia Master Fund fell 5.11 percent and the OZ Europe Master Fund was off 3.35 percent.
Last year the OZ Master Fund was down just 0.28 percent, while the OZ Asia Master Fund and the OZ Europe Master Fund were up 9.64 percent and 5.89 percent, respectively, for the year.
However, investors in the stock of Och-Ziff — one of the only publicly traded hedge fund firms — have fared a lot worse. The shares are down about 36 percent this year alone and are off by 70 percent since their peak last May.
Meanwhile, in February, Washington-based Compass Point Research & Trading, one of the only investment banks to follow the company, downgraded the shares from buy to neutral and cut its price target for the stock from $7.50 to $5.50. The stock closed Friday at $4.
What’s going on here?
Part of it is performance related. Lower results — or a loss — means lower performance fees, which drive revenues. For example, last year management fees were roughly flat at $642 million. However, incentive income fell by 63 percent to $205 million.
Investors and Wall Street were also upset that the company reported a net loss for the fourth quarter. As a result, the company said it would not pay a dividend for that quarter.
And then on its earnings call in February, Och-Ziff said its expenses for 2016 will be higher than analysts were modeling. Last year non-compensation-related expenses increased 60 percent.
In addition, the firm suffered $4.7 billion in net outflows from its multistrategy funds in 2015 and $1.2 billion in January of this year. “These net outflows were primarily from the Master Fund as market volatility and challenging market conditions for the industry overall negatively affected our flows,” Och, who serves as chairman and chief executive officer, told investors on the conference call.
Meanwhile, Och-Ziff continues to be the subject of an investigation for possible violations of the Foreign Corrupt Practices Act (FCPA), which Och conceded on the call “has also had some impact on investment decisions” by certain investors.
It also accounted for some of the surge in expenses.
Two years ago Och-Ziff said it had received subpoenas from the Securities and Exchange Commission and requests for information from the Department of Justice related to a probe involving the FCPA and related laws. It explained that the investigation concerns an investment by a foreign sovereign wealth fund in some of the Och-Ziff funds in 2007 and investments by some of the funds in a number of companies in Africa.
“It is certainly still our hope the investigation is concluded by the middle of this year,” said Joel Frank, chief financial officer and senior chief operating officer, on the earnings call. “We know the investigation has raised questions and created uncertainty; unfortunately, because it is ongoing, we cannot provide any further information at this point or speculate on the potential outcomes.”
After the earnings call, Compass Point downgraded the stock and its price target as well as its 2016 earnings estimate. “Our revised estimates reflect lower multi-strategy fund appreciation and capital inflows, as well as higher comp and non-comp expenses,” the research firm stated in its report.
However, with the share price at $4, there is some speculation that this is as low as the stock could go. Compass Point stresses that Och-Ziff “has a proven track record of strong recoveries following weak markets.”
In an updated note dated March 2, the research firm remained neutral on the shares, noting that the stock price “appropriately reflects elevated expense levels, ongoing uncertainty regarding the outcome of the FCPA investigation, and a less optimistic outlook for incentive income.”
However, Compass Point asserted, “While we are not compelled by near-term earnings prospects, OZM’s upside potential is significant should market conditions improve.”
