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Och-Ziff’s low risk appetite due to inadequate diversification

Och-Ziff’s have exposure predominantly in North America and Europe, limiting its investors’ to enjoy growing Asian economies like China and India at its fullest. On the back of group’s current investment strategy, it holds low immunity for major economic turndown in the North America orEurope. This is evident from its recently announced annual results for 2011 where its OZ Europe Master Fund, with major exposure inEurope, witnessed a decline of 23% in AUM, year over year.

High concentration in North America and Europe:

As per the latest quarterly results announced by the company, on January 1, 2012 49% of the group’s total FUM are invested in North America followed by 33% and 18% invested in Europe and Asia, respectively. As per the geographic division defined by OCH Ziff, the North America exposure includesUSA,Canada, Central America andSouth America. Europe includes European countries along with investments in Africa and Middle East and the Asian exposure includes Asia,AustraliaandNew Zealand.

 

Low risk tolerance due to inadequate diversification:

The company exposed to various risks due to its investment dominance in the developed regions. First risk is that the funds may not be able to enjoy the benefit of high growth in Asian economies. Secondly, many of its competitors like AllianceBernstein and UBS have strong presence and expertise in other geography areas.

Moreover, as expected by most economists the Europe may enter the recession whereas, theUSwill witness small GDP growth. Stock and real estate market are predominantly affected by the economic condition of the country and if we expect the economies for the developed markets to witness low activity, than the investors should not keep any optimistic opinion about OCH Ziff.

The group needs to expand further in other geographical markets to increase its risk appetite.

AUM by strategy:

As per the current strategy of the group, 24% of the total AUM is engaged in special situation long-short equity. Among other constituents structured credit, convertible and derivative arbitrage and credit accounts 18%, 14% and 13% of AUM, respectively.

Passive Management:

The management attitude is little passive towards the investment portfolio, the management is more interested to play safe and produce best possible returns. The group passive investment strategy helped the group to sustain incredibly in the 2008 crisis but this strategy does not look very popular for the current economic situation.

 

Reasonable AUM movement:

As of Dec 31, 2011, group’s total assets under management were recorded at $28.8 billion against $27.9 billion recorded last year, posting a growth of 3% year over year. During the out going year, the company witnessed net inflows of $1.1 billion of which 26% was eroded due to a performance-related depreciation of $284.8 million and only $832 million was carried forward.

Assets under management by fund:

(dollars in billion)

 Dec 31, 2011

 Dec 31, 2010

% Change YoY

OZ Master Fund       20.20

      19.60

3%

OZ Europe Master Fund         2.30

        3.00

-23%

OZ Asia Master Fund         1.60

        1.50

6%

OZ Global Special Investments Master Fund         1.00

        1.20

-21%

Other         3.70

        2.60

44%

 

As of January 1, 2012, 87% of total AUM of OCH Ziff was invested in its four main funds with 70% assets managed by OZ Master Fund. OZ Europe, OZ Asia and OZ Global Special Investments Master Fund constitutes 8%, 6% and 3% respectively.

Remaining 13% of he AUM is invested in alternatives investment vehicles including real estate.

 

AUM Composition (fund wise):

As per 2010 annual report of OZ Master Fund is the largest fund of the company.  The fund is mainly invested in North America (55%) followed by investment in Europe (31%) andAsia(14%). OZ Europe Master Fund and OZ Asia Master Fund, multi-strategy funds, allocate funds opportunistically in Europe andAsia, respectively. As far as OZ Global Special Investments Master Fund is concerned, it invests globally in equity, credit and other opportunities available globally.

Funds sitting high on cash:

The group is sitting on a large amount of idle cash. As per the January 1, 2012, 21% of the FUM are held as cash. The high cash level shows management incompetence to make suitable investments. The high cash levels can obstruct overall funds performance.

Latest performance:

In February the company has released its fourth quarter earning and performance review. The company’s hedge funds lost an average of 5.16% in 2011. In the last quarter the FUM were recorded flat from levels of last quarter ending, September 30, 2011.

In terms of investment performance, the group’s funds posted a mixed trend where Master and Europe Master Fund posted a decline of 0.48% and 4.93%, respectively. Contrarily, the Global Special Investments Master Fund increased by 3.16%.

Leverage position:

As a fundamental rule, the company does not use leveraging to boost it returns and relies more on its in-house available liquidity. The lowest levels of leverage limits the downside of the funds and but on the other hand it also limits its upside. Leveraging is an industry practice, company policy does gives its investors some cushion incase of sever market crisis. As evidence, the company was able to sustain in the 2008 crisis, which it recognizes as a major achievement.