Rough times at Och-Ziff Capital

Och-Ziff Capital Management LLC's assets fell a precipitous $11.3 billion over the past six quarters after redemptions drained the firm's most liquid investment strategies in its flagship hedge fund family.

The fate of the firm is resting in the hands of institutional investors that are deciding whether to remain with the New York-based manager after it settled federal charges Sept. 29 relating to violations of the Foreign Corrupt Practices Act over bribes paid to Libyan officials by a subsidiary.

What is apparent from the Och-Ziff's quarterly earnings reports is that the assets have fallen 23.4% to $37 billion as of Nov. 1 from the peak of $48.3 billion as of March 31, 2015.

The U.S. Department of Justice and the Securities and Exchange Commission began a joint investigation of the company in 2011, but it wasn't until the third quarter of 2015 that OZ's firmwide assets began to drop significantly. Assets have fallen every quarter since, a combination of net outflows and modestly positive to negative performance.

The firm's six multistrategy hedge funds have borne the brunt of investor withdrawals, with assets declining 31% or $10.5 billion to $23.4 billion as of Sept. 30 from $33.9 billion on March 31, 2015, with outflows balanced by modest investment gains, Pensions & Investments' analysis of OZ quarterly reports showed.

In addition to net outflows, gross inflows into Och-Ziff's multistrategy hedge funds were “substantially lower this year,” Daniel S. Och, chairman and CEO, told analysts during a second-quarter earnings call.

“We believe that this is the result of a number of factors, including the macroeconomic backdrop, (and) individual LP allocation decisions,” Mr. Och added.

Institutional investor reaction to Och-Ziff's legal travails and subsequent action/inaction has varied widely, sources said.

Among asset owners that have asked to redeem all or part of their investments in Och-Ziff hedge funds are:

• Goldman Sachs Group Inc., New York, which dropped a $350 million Och-Ziff hedge fund investment from its $6.4 million employee 401(k) plan;
• San Antonio (Texas) Fire & Police Pension Fund, which withdrew a $15 million investment the $2.7 billion plan had made in Och-Ziff Master Fund;
• the New Jersey Division of Investment, Trenton, which cut a $190 million investment in OZ Domestic Partners II, one of 11 investments dropped as part of a reduction to 6% from 12.5% in the hedge fund allocation of the $73 billion New Jersey Pension Fund; and
• the Rhode Island State Investment Commission, which redeemed $103 million from an OZ hedge fund as well as full and partial redemptions from seven other hedge funds on behalf of the $7.7 billion Rhode Island Employees' Retirement System, Providence, in a move that reduced the 15% hedge fund allocation by more than half.

By contrast, assets managed in the Och-Ziff long-only $12.5 billion credit and $2.1 billion real estate fund families have remained steady during the six-quarter period ended Sept. 30. These less liquid funds have longer lock-up periods — between three and 10 years — than the Och-Ziff multistrategy hedge funds, making it difficult for investors to exit these strategies if they want to.

Other asset owners are comfortable — but vigilant — with their Och-Ziff investments. “The settlement was consistent with information both publicly disclosed in various media outlets over the past year and with information communicated directly by OZ that we had shared with our board on an ongoing basis,” said one pension official who asked not to be identified.

Ron Kumar, investment officer of San Jose (Calif.) Police & Fire Department Retirement Plan, wrote in an Oct. 14 letter to the plan's investment committee that the $3 billion plan should keep its $20 million commitment ($6 million has been invested to date) to Och-Ziff Real Estate Fund III. Mr. Kumar said that Och-Ziff fund does not have any investments in Africa and is a separate investment platform from other funds within the Och-Ziff fund family.

The Florida State Board of Investment, Tallahassee, will maintain its 4-year-old, $250 million investment in the OZ Domestic Partners II hedge fund, said John Kuczwanski, an SBA spokesman, in an e-mail: “We continue to monitor the issue and there are no changes slated at this time.” The SBA manages a total of $177.4 billion in state funds, including the $143.1 billion of the Florida Retirement System defined benefit plan.

The $24.7 billion Texas County & District Retirement Plan, Austin, has not indicated that it will terminate its total investment of $600 million, split evenly between an OZ hedge fund and a credit fund.

Although the New Jersey Division of Investment did liquidate its Och-Ziff hedge fund investment, it has not signaled that it will seek to redeem the $2.1 billion it has committed and invested in eight Och-Ziff credit, real estate and real assets funds.

Joseph Snodgrass, a company spokesman, declined to comment.

It's impossible to discern from company filings exactly how much of the previous redemptions came from pension funds, endowments and foundations. But the firm's earnings reports do provide a breakdown of clients by type and show. As of Oct. 1, 45% of clients were classified as institutional, broken down into 33% pension funds and 12% endowments and foundations. As of April 1, 2015, institutional investors were 45% of OZ's client base — 33% pension funds and 12% endowments and foundations.

And as high as redemptions have been over the past 15 months, more are likely.

Mr. Och told analysts on a third-quarter earnings call that the firm still expects redemptions in the final quarter of 2016 to “remain somewhat elevated,” acknowledging “it is too early to tell (how high redemptions will be with) any specificity because a final notice period for the quarter expires on Dec. 1,” according to a transcript.

“Since we announced the investigation settlement in the late September, we've had a significant number of conversations with (limited partners) to explain the settlement (and) walk through the steps we've taken to transform the firm,” Mr. Och said. “We believe this communication strategy has worked well and these conversations have been productive.”

Mr. Och described to analysts some of the changes Och-Ziff made as part of the settlement with the DOJ and the SEC to tighten the firm's investment practices, including significant investment to enhance due diligence, risk assessment and closed-transaction monitoring and the creation of a business risk committee to review non-investment risks in transactions.

In an attempt to appease investors, Och-Ziff lowered the management fee on its main hedge funds by 25 basis points prior to the settlement with federal authorities.