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OZM > SEC Filings for OZM > Form 10-Q on 5-Nov-2012All Recent SEC Filings

Show all filings for OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

Form 10-Q for OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC


5-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in "Part I-Item 1A. Risk Factors" of our Annual Report. Actual results may differ materially from those contained in any forward-looking statements. This MD&A should be read in conjunction with our Annual Report. An investment in our Class A Shares is not an investment in any of our funds.

Overview

Our Business

We are one of the largest institutional alternative asset managers in the world, with approximately $31.8 billion in assets under management as of November 1, 2012. We provide asset management services globally through our hedge funds and other alternative investment vehicles. Our funds seek to generate consistent, positive, absolute returns across market cycles, with low volatility compared to the equity markets. We have always limited our use of leverage to generate investment performance with an emphasis on preservation of capital. Our assets under management are generally invested on a multi-strategy basis, across multiple geographies, although certain of our funds are focused on specific sectors, strategies and geographies. Our primary investment strategies are convertible and derivative arbitrage, corporate credit, long/short equity special situations, merger arbitrage, private investments and structured credit. Our fund investors value our funds' consistent performance history, our global investing expertise, and our diverse investment strategies, combined with our strong focus on risk management and sustaining a robust operational infrastructure.

Overview of Our 2012 Third Quarter Results

As of September 30, 2012, our assets under management were $31.3 billion, compared with $28.8 billion as of September 30, 2011. The $2.5 billion year-over-year increase was driven by performance-related appreciation of $2.5 billion, partially offset by capital net outflows of $16.4 million. Consistent with what we experienced in the first half of 2012, interest in both our multi-strategy and dedicated credit funds remained strong. During the third quarter of 2012, we also launched our first collateralized loan obligation ("CLO"). Capital inflows to the hedge fund industry increased modestly during the third quarter, and we believe that ongoing concerns about the weak macroeconomic environment globally continued to weigh on near-term investor confidence.

For the third quarter of 2012, we reported a GAAP net loss allocated to Class A Shareholders of $127.5 million, compared to a net loss of $93.1 million for the third quarter of 2011, and $366.5 million for the first nine months of 2012, compared to a net loss of $282.0 million for the first nine months of 2011. The GAAP net losses primarily resulted from non-cash Reorganization expenses associated with our 2007 Offerings of $398.5 million and $408.6 million for the three months ended September 30, 2012 and 2011, respectively, and $1.2 billion for the nine months ended September 30, 2012 and 2011.

We reported Economic Income for the Company of $81.3 million for the third quarter of 2012, compared to $86.6 million for the third quarter of 2011, and $251.2 million for the first nine months of 2012, compared to $253.5 million for the first nine months of 2011. The decrease for both periods was driven by an increase in non-compensation expenses and a decrease in management fees, partially offset by decreases in compensation and benefits expenses. Partially offsetting the decrease in Economic Income for the year-to-date period was an increase in incentive income. For a discussion of these drivers, please see "-Economic Income Analysis." Economic Income for the Company is a non-GAAP measure. For additional information regarding non-GAAP measures, see "-Economic Income Analysis."

Overview of 2012 Third Quarter Fund Performance

During the 2012 third quarter, we continued to build on the strong performance we generated in the first half of the year. Against a backdrop of mixed macroeconomic conditions globally, we actively managed our exposures and remained opportunistic in deploying capital in each of our portfolios. Our diversified investment platforms enable us to identify and capitalize on global investment trends across regions and asset classes.

During the quarter, we were very active in allocating capital across our strategies. We began the quarter with a cash balance of 7% in the OZ Master Fund. We deployed this cash largely by increasing our allocations to U.S. and European long/short equity special situations strategies, and ended the quarter fully invested.

During the third quarter of 2012, the OZ Master Fund generated a net return of 3.5%, the OZ Europe Master Fund a net return of 3.0%, the OZ Asia Master Fund a net return of 1.9% and the OZ Global Special Investments


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Master Fund a net return of 2.4%. During the first nine months of 2012, the OZ Master Fund generated a net return of 8.6%, the OZ Europe Master Fund a net return of 6.4%, the OZ Asia Master Fund a net return of 4.2% and the OZ Global Special Investments Master Fund a net return of 7.5%. Performance through September 30, 2012 was driven primarily by our structured credit, long/short equity special situations and corporate credit strategies. For important information about our fund performance data, please see "-Fund Performance Summary."

Financial Market and Capital Flow Environment

Our ability to generate management fees and incentive income is impacted by the financial markets, which influences our ability to generate returns for our fund investors, and by the amount of capital flowing into and out of the hedge fund industry, which impacts our ability to retain existing investor capital and the amount of new assets we attract.

Financial Market Environment

Our ability to successfully generate consistent, positive, absolute returns is dependent on our ability to execute each fund's investment strategy or strategies. Each investment strategy may be materially affected by conditions in the financial markets, and by global economic and business conditions.

During the third quarter of 2012, global equity indices generally posted positive returns for the quarter, while volatility reached multi-year lows in August. Central banks in the U.S., Europe and Japan each made announcements outlining stimulus measures, although uncertainty remains around the specific details of each plan. The steps taken by the European Central Bank (the "ECB") have helped alleviate concerns about a Euro zone break-up in the near term. However, investor attention remains focused on Greece, Italy and Spain. Additionally, mixed economic reports, a continued slowdown of growth in China and potential leadership changes, including in the U.S., Germany and China, also caused investors to remain cautious.

Global policy decisions had a positive impact on credit markets as demonstrated by their strong performance during the quarter. During the period, fixed income investors continued to invest in higher-yielding products. As a result, U.S. high-yield and leveraged loans performed very strongly. Capital market conditions for both primary and secondary issuances were robust and default rates were low. European credit markets rallied, driven by the potential for more active market interventions by the ECB. Primary issuance for new high-yield and leveraged loans increased from summer lows, albeit on lower than expected volumes. Asian credit markets were robust and benefitted from strong inflows into the asset class.

Capital Flow Environment

During the 2012 third quarter, capital inflows to the hedge fund industry increased modestly. We believe that ongoing concerns about the weak macroeconomic environment globally continue to weigh on near-term investor confidence. However, we remain confident that allocations to the industry will grow as institutional investors increasingly seek to enhance the yield and reduce the volatility of both their equity and fixed income portfolios. We believe these drivers of secular growth will continue to increase in importance as market conditions remain unsettled and interest rates stay extremely low.

Assets Under Management

Our financial results are primarily driven by the combination of assets under management and the investment performance of our funds. Both of these factors directly impact the revenues we earn from management fees and incentive income. Growth in assets under management due to capital placed with us by investors in our funds and positive investment performance of our funds drive growth in our revenues and earnings. Conversely, poor investment performance slows our growth by decreasing our assets under management and increasing the potential for redemptions from our funds, which would have a negative effect on our revenues and earnings.

We typically accept capital from new and existing investors in our funds on a monthly basis on the first day of each month. Investors in our funds (other than investors in our real estate funds, certain credit funds and certain other alternative investment vehicles we manage and other than with respect to capital invested in Special Investments) typically have the right to redeem their interests in a fund following an initial lock-up period of one to three years. Following the expiration of these lock-up periods, subject to certain limitations, investors may redeem capital generally on a quarterly or annual basis upon giving 30 to 45 days prior written notice. However, upon the payment of a redemption fee to the applicable fund and upon giving 30 days prior written notice, certain investors may redeem capital


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during the lock-up period. The lock-up requirements for our funds may generally be waived or modified at the sole discretion of each fund's general partner or board of directors, as applicable. The after-tax proceeds from the 2007 Offerings reinvested by our executive managing directors in our funds are subject to a five-year lock-up that expires in December 2012.

With respect to investors with quarterly redemption rights, requests for redemptions submitted during a quarter generally are paid on the first day of the following quarter. Accordingly, quarterly redemptions generally will have no impact on management fees during the quarter in which they are submitted. Instead, these redemptions will decrease assets under management as of the first day of the following quarter, which reduces management fees for that quarter. With respect to investors with annual redemption rights, redemptions paid prior to the end of a quarter impact assets under management in the quarter in which they are paid, and therefore impact management fees for that quarter.

Information with respect to our assets under management throughout this report, including the tables set forth in this discussion and analysis, includes investments by us, our executive managing directors, employees and certain other related parties. Prior to our IPO, we did not charge management fees or earn incentive income on these investments. Following our IPO, we began charging management fees and earning incentive income on new investments made in our funds by our executive managing directors and certain other related parties, including the reinvestment by our executive managing directors of their after-tax proceeds from the 2007 Offerings. As of September 30, 2012, approximately 9% of our assets under management represented investments by us, our executive managing directors, employees and certain other related parties in our funds. As of that date, approximately 33% of these affiliated assets under management are not charged management fees and are not subject to an incentive income calculation.

As further discussed below in "-Understanding Our Results-Revenues," we generally calculate management fees based on assets under management as of the beginning of each quarter. The assets under management in the tables below are presented net of management fees and incentive income and are as of the end of the period. Accordingly, the assets under management presented in the tables below are not the amounts used to calculate management fees for the respective periods.

Summary of Changes in Assets Under Management

The table below presents the changes to our assets under management and our
weighted-average assets under management for the respective period.
Weighted-average assets under management exclude the impact of third quarter
investment performance for the periods presented, as these amounts do not impact
management fees calculated for that period.



                                       Three Months Ended September 30,           Nine Months Ended September 30,
                                           2012                  2011                 2012                 2011
                                                                 (dollars in thousands)
Balance-beginning of period          $      29,927,730       $  29,767,562      $     28,766,340       $  27,934,696
Net flows                                      270,236             228,787                21,585           1,154,420
Appreciation (Depreciation)                  1,071,079          (1,188,779 )           2,481,120            (281,546 )

Balance-end of period                $      31,269,045       $  28,807,570      $     31,269,045       $  28,807,570


Weighted-average assets under
management                           $      29,934,062       $  29,737,200      $     29,423,209       $  29,028,769

In the nine months ended September 30, 2012, our funds experienced performance-related appreciation of $2.5 billion and capital net inflows of $21.6 million, which were comprised of $2.6 billion of gross inflows and $2.6 billion of gross outflows. Direct allocations from pension funds continue to be the largest driver of our inflows, while redemptions from fund-of-funds were the largest driver of our outflows. Our gross inflows also included $456.1 million related to the closing of our first CLO in July 2012. CLOs generally pay lower fees than our traditional hedge fund products. Interest in both our multi-strategy and dedicated credit funds remained strong. We also continued to focus on creating platforms that can be tailored to meet the strategic investment objectives of institutional investors. These types of platforms are also an important source of future growth for our business.

In the nine months ended September 30, 2011, our funds experienced capital net inflows of $1.2 billion, which were comprised of $3.8 billion of gross inflows and $2.6 billion of gross outflows, and performance-related depreciation of $281.5 million. The inflows came from a diverse mix of investors globally. We believe that unsettled market conditions in 2011 and longer internal decision-making processes on the part of institutional investors impacted the pace of new capital commitments to the hedge fund industry generally and to the Och-Ziff funds during the 2011 third quarter. Additionally, our real estate


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funds and various other assets that we manage with longer than one-year performance measurement periods comprised a meaningful portion of gross inflows in the nine months ended September 30, 2011. The outflows were driven by a variety of factors influencing our fund investors.

Assets Under Management by Fund



                                                          September 30,
                                                      2012             2011
                                                     (dollars in thousands)
      OZ Master Fund                              $ 21,415,017     $ 20,046,463
      OZ Europe Master Fund                          1,989,515        2,436,412
      OZ Asia Master Fund                            1,448,294        1,622,089
      OZ Global Special Investments Master Fund      1,040,426          986,409
      Other(1)                                       5,375,793        3,716,197

      Total                                       $ 31,269,045     $ 28,807,570

(1) Includes real estate funds, credit funds and other alternative investment vehicles we manage.

OZ Master Fund

The $1.4 billion year-over-year increase in assets under management for the OZ Master Fund was driven by positive investment performance during each quarter and capital net inflows in the fourth quarter of 2011. These increases were partially offset by capital net outflows experienced in the first three quarters of 2012.

OZ Europe Master Fund

The $446.9 million year-over-year decrease in assets under management for the OZ Europe Master Fund was driven by capital net outflows experienced in each quarter and performance-related depreciation in the fourth quarter of 2011 and the second quarter of 2012. These decreases were partially offset by positive investment performance in the first and third quarters of 2012.

OZ Asia Master Fund

The $173.8 million year-over-year decrease in assets under management for the OZ Asia Master Fund was driven by capital net outflows experienced in the first three quarters of 2012 and performance-related depreciation in the fourth quarter of 2011 and the second quarter of 2012. These decreases were partially offset by positive investment performance during the first and third quarters of 2012 and capital net inflows in the fourth quarter of 2011.

OZ Global Special Investments Master Fund

The $54.0 million year-over-year increase in the assets under management for the OZ Global Special Investments Master Fund was driven by positive investment performance in the fourth quarter of 2011 and the first and third quarters of 2012, partially offset by capital net outflows experienced in each quarter and performance-related depreciation in the second quarter of 2012.

Other

The $1.7 billion year-over-year increase in the assets under management in our other funds was primarily due to the launch of our first CLO that closed in July 2012, as well as growth in our dedicated credit platforms.

Fund Performance Summary

Fund investment performance, as generally measured on a calendar-year basis, determines the amount of incentive income we will earn in a given year. Incentive income is generally 20% of the net realized and unrealized profits attributable to each of our fund investors (excluding unrealized gains and losses attributable to Special Investments), and subject to any high-water marks.


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Performance information for our most significant master funds is included throughout this discussion and analysis to facilitate an understanding of our results of operations for the periods presented. The performance information reflected in this discussion and analysis is not indicative of the performance of our Class A Shares and is not necessarily indicative of the future results of any particular fund. An investment in our Class A Shares is not an investment in any of our funds. There can be no assurance that any of our master funds or our other existing and future funds will achieve similar results.

The table below presents the performance information for our most significant master funds (by asset size). The net returns shown represent the composite performance of all feeder funds that comprise each of the master funds presented. The net return is calculated using the total return of all feeder funds, net of all fees and expenses of such feeder funds and master funds (except, as noted above, incentive income on unrealized gains attributable to Special Investments that could reduce returns in these investments at the time of realization) and the returns of each feeder fund include the reinvestment of all dividends and other income. The net returns also include realized and unrealized gains and losses attributable to Special Investments and initial public offering investments that are not allocated to all investors in the feeder funds. Investors that were not allocated Special Investments and initial public offering investments may experience materially different returns.

                                                        Net Return for the                           Net Return for the
                                                 Three Months Ended September 30,              Nine Months Ended September 30,
                                                  2012                     2011                2012                     2011
OZ Master Fund                                         3.5 %                     -3.8 %             8.6 %                     -0.5 %
OZ Europe Master Fund                                  3.0 %                     -5.3 %             6.4 %                     -3.5 %
OZ Asia Master Fund                                    1.9 %                     -4.9 %             4.2 %                     -3.6 %
OZ Global Special Investments Master Fund              2.4 %                     -3.6 %             7.5 %                      2.7 %

OZ Master Fund

The table below presents a summary of each investment strategy's contribution to
the OZ Master Fund's return before management fees and incentive income:



                                                Three Months Ended September 30,            Nine Months Ended September 30,
                                                 2012                     2011               2012                     2011
Convertible and Derivative Arbitrage                     3 %                      0 %                6 %                     43 %
Corporate Credit                                        18 %                     27 %               21 %                      1 %
Long/Short Equity Special Situations                    34 %                     43 %               29 %                    -30 %
Merger Arbitrage                                        -1 %                      2 %                1 %                      5 %
Private Investments                                      2 %                     11 %                3 %                    -20 %
Structured Credit                                       45 %                     16 %               41 %                    115 %
Other                                                   -1 %                      1 %               -1 %                    -14 %

Total                                                  100 %                    100 %              100 %                    100 %


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OZ Europe Master Fund

The table below presents a summary of each investment strategy's contribution to
the OZ Europe Master Fund's return before management fees and incentive income:



                                                Three Months Ended September 30,            Nine Months Ended September 30,
                                                 2012                     2011               2012                     2011
Convertible and Derivative Arbitrage                     1 %                     -5 %                2 %                    -50 %
Corporate Credit                                        43 %                     21 %               39 %                    -26 %
Long/Short Equity Special Situations                    29 %                     32 %               32 %                    117 %
Merger Arbitrage                                        -1 %                      4 %                3 %                    -14 %
Private Investments                                    -11 %                     33 %              -17 %                     62 %
Structured Credit                                       38 %                     14 %               41 %                    -25 %
Other                                                    1 %                      1 %                0 %                     36 %

Total                                                  100 %                    100 %              100 %                    100 %

OZ Asia Master Fund

The table below presents a summary of each investment strategy's contribution to
the OZ Asia Master Fund's return before management fees and incentive income:



                                                Three Months Ended September 30,            Nine Months Ended September 30,
                                                 2012                     2011               2012                     2011
Convertible and Derivative Arbitrage                     8 %                      6 %               11 %                     -4 %
Corporate Credit                                        24 %                      8 %               33 %                    -26 %
Long/Short Equity Special Situations                    45 %                     72 %               54 %                    159 %
Merger Arbitrage                                        -2 %                     -2 %               -3 %                    -11 %
Private Investments                                     31 %                     14 %                9 %                    -56 %
Other                                                   -6 %                      2 %               -4 %                     38 %

Total                                                  100 %                    100 %              100 %                    100 %

OZ Global Special Investments Master Fund

The table below presents a summary of each investment strategy's contribution to
the OZ Global Special Investments Master Fund's return before management fees
and incentive income:



                                                Three Months Ended September 30,            Nine Months Ended September 30,
                                                 2012                     2011               2012                     2011
Corporate Credit                                         6 %                      3 %               10 %                     12 %
Long/Short Equity Special Situations                    19 %                     37 %               14 %                    -15 %
Merger Arbitrage                                         0 %                      1 %                1 %                      1 %
Private Investments                                      8 %                     30 %               18 %                     47 %
Structured Credit                                       68 %                     30 %               59 %                     64 %
Other                                                   -1 %                     -1 %               -2 %                     -9 %

Total                                                  100 %                    100 %              100 %                    100 %

Understanding Our Results

Revenues

Our operations have been financed primarily by cash flows generated by our business. Our principal sources of revenues are management fees and incentive income. For any given period, our revenues are influenced by the amount of our assets under management, the investment performance of our funds and the timing of when we recognize incentive income for certain assets under management as discussed below.

The ability of investors to contribute capital to and redeem capital from our . . .

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