Och-Ziff Capital Management Group LLC Q1 2010 Earnings Call Transcript

| About: Och-Ziff Capital (OZM)

Och-Ziff Capital Management Group LLC (NYSE:OZM)

Q1 2010 Earnings Call Transcript

May 4, 2010 8:30 am ET

Executives

Tina Madon – Head, IR

Dan Och – Chairman and CEO

Joel Frank – CFO

Analysts

Steven Truong – Barclays Capital

Dan Fannon – Jefferies

Bill Katz [ph] – Citigroup

Marc Irizarry – Goldman Sachs

Ken Worthington – JP Morgan

Cynthia Mayer – Banc of America

Robert Lee – KBW

Roger Freeman – Barclays Capital

Operator

Good morning, everyone, and welcome to the Och-Ziff Capital Management Group 2010 first quarter earnings conference call. My name is Maj, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. All lines have been placed on mute to prevent any background noise. (Operator instructions) I would now like to turn the call over to Tina Madon, Head of Investor Relations of Och-Ziff.

Tina Madon

Great. Thanks, Maj. Good morning, everyone, and welcome to our call today. With me are Dan Och, our Chairman and CEO; and, Joel Frank, our Chief Financial Officer.

I'd like to remind you that today's call may include forward-looking statements. These statements reflect the current views of management about, among other things, assumptions with respect to levels of assets under management, future events, and financial performance, many of which by their nature are inherently uncertain and outside of our control. Och-Ziff’s actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. The company does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise.

During today's call, we will be referring to economic income, distributable earnings, and other financial measures, which are not prepared in accordance with US Generally Accepted Accounting Principles. Information about and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available in our earnings release, which is posted on the For Shareholders page of our Web site. Furthermore, no statements made during this call should be construed as an offer to purchase shares of the company or an interest in any Och-Ziff fund.

Today's call is being recorded and is copyrighted material of Och-Ziff Capital Management Group LLC. Telephonic and webcast replays will be made available later today. You can find the details for both on our Web site at www.ozcap.com.

Now, let me turn the call over to Dan.

Dan Och

Thanks, Tina. Good morning, everyone, and thank you for joining our call today. This morning I’ll review our year-to-date investments performance as of April 30th and assets under management as of May 1st. I’ll also discuss the current environment that we’re seeing for capital flows and briefly update you on our business.

During the first quarter and in the month of April, we continued our trend of generating consistent strong risk-adjusted returns for our fund investors. As you have heard me say before, we invest and seek to generate performance that has low volatility and a low correlation to the equity markets. The stability of our returns over time is a function of our underlying risk management and investment processes, our low use of leverage, and our emphasis on diversification. These attributes are, and have always been, intrinsic to our multi-strategy, multi-geographic approach, which is unique in the marketplace. In addition, having a true multi-strategy focus, combined with an ability to evaluate new asset classes globally on building expertise in those where we believe there is potential enables us to be nimble in capitalizing on investment opportunities in many different areas.

The investment environment today presents a diversified opportunity set that plays to the strength of our investment processes and our international capabilities. We are seeing attractive ideas in equity strategies, which are normally dependent upon growth, such as merger arbitrage and equity restructurings, while simultaneously seeing opportunities in dislocated assets such as distressed and structured credit. Additionally, international economic growth is not as synchronized with the US as it has been in prior cycles. And this divergence also creates compelling investment opportunities. Our multi-strategy, multi-geographic approach positions us to continue extending our track record of generating strong risk-adjusted returns and create additional capacity to grow assets under management.

Furthering the trend we have seen for several quarters, fund investors are continuing to indicate strong interest in our platforms. We believe we had been a leading beneficiary of the capital flows in the industry over the last six months. And we expect this trend to continue. We remain confident that institutional investors in the US is a manager of choice because of our consistent performance track record, our demonstrated alignment with our fund investors, and our history of providing transparency and a robust infrastructure that is tailored to meet their requirements. These attributes continue to be extremely important to current and potential investors in our funds. And we believe that they have led to sustained increases in our competitive positioning over the last couple of years.

Now, let me turn to our business results starting with assets under management. As we announced this morning, our assets under management as of May 1st totaled $26 billion, increasing $2.5 billion from $23.5 billion on January 1st of this year due to $1.6 billion of capital net inflows and $900 million of performance-related appreciation. This amounts included net inflows of $500 million on May 1st and $200 million of performance-related appreciation for the month of April.

The net inflows we have seen year-to-date are following a consistent pattern of coming from mix of existing and new investors that has diversified both in terms of geography and type. And we are still seeing specific interest from pension funds and international capital sources. We believe that confidence among institutional investors in placing capital with alternative asset managers has continued to increase this year. As a result, we think that the capital inflow cycle for the hedge fund industry is underway, and that we are well-positioned for additional growth in our assets under management. However, I would like to remind you that, as always, it is difficult to predict the pace of investment. And we fully expect that the month-to-month trend in net flows will vary as they have historically.

Now, let me turn to our fund’s investment performance. Year-to-date to April 30th, our Master Fund was up 3.6% net. Our Europe Master Fund was up 5.1% net. Our Asia Master Fund was up 6.3% net. And our global special investment fund was up 5% net. These results were primarily driven by investment discipline dependent upon growth and those which focus on distressed and dislocated opportunities, such as structured credit and distressed credits in the US and Europe, equity restructuring in the US and Europe, and convertible arbitrage in Asia.

Now, let me take a moment to update you on a change we have made to the allocation of partner capital between our funds. As I mentioned previously, we believe we are a manager of choice in large part business of our demonstrated alignment with our fund investors and because we tailor our business to meet their requirements. These attributes were catalysts for the decision my partners and I made during the first quarter to reallocate $714 million of our $1.5 billion investment in the global special investments fund to our other funds, although essentially, all of these amount was reinvested in the Master Fund.

As a reminder, this capital was the after-tax proceeds from our 2007 IPO, 100% of which was previously invested in the global special investments fund. Going forward, our capital is still subject to the original five-year lock-up from the time of our IPO. And the amount remaining in the global special investments fund will still be used to invest in our private platforms. The majority of our fund investors capital is in the Master Fund. And this reallocation further aligns our exposures with theirs. It also reflects the fact that fund investors have become more selective in their appetite for exposure to private investments and are generally more focused on the range of opportunities we’re seeing on a multi-strategy basis.

As always, we continue to pursue a patient, disciplined approach to investing. And we believe that attractive ideas exist across all of our strategies. In this context, our private investments business will remain an ongoing focus for us. Although they take longer to develop and are slower to evolve, we are targeting the private platforms and stand-alone investments, which we believe will offer the greatest value to our fund investors over time. For example, our second real estate platform had its first closing at the end of April.

With that, now let me turn the call over to Joel.

Joel Frank

Thanks, Dan. This morning I will review our 2010 first quarter results and also update you on how we are thinking about expenses. For the 2010 first quarter, we reported a GAAP net loss of $89 million or $1.07 per basic and diluted class A share. As always, a discussion of our GAAP result is contained in our press release for your reference.

Now let’s turn to the details behind our first quarter 2010 economic income starting with revenue. Management fee totaled $100 million, of which $99 million was attributable to the fund segment and $1 million to other operations, a 5% increase from the 2009 fourth quarter due to the increase in assets under management from October 1st to January 1st of approximately $1.4 billion. From January 1st to April 1st, our assets under management increased by approximately $1.8 billion to approximately $25.3 billion. This increase was due to net inflows of approximately $1.1 billion and performance-related appreciation of $744 million. Our average management fee remained at 1.7%. This is a blended rate that includes the effect of our non-fee paying assets.

Now, let me turn to the first quarter 2010 expenses. Our operating expenses are comprised of compensation and benefits and non-compensation costs. Comp and benefits totaled $22 million during the first quarter, with $18 million attributable to the fund segment, and $4 million to other operations. Of the total, salaries and benefits were $19 million, down slightly from the 2009 fourth quarter with $15 million attributable to the fund segment and $4 million to other operations. First quarter comp and benefits also included $3 million of bonus expense, which is essentially all attributable to the fund segment. This amount is 39% lower year-over-year, reflecting reduced level of one-time non-recurring payment. Total salaries and benefits were 19% of management fees in the first quarter. We expect this ratio to be approximately 19% to 21% for the second quarter of this year.

Now, turning to non-compensation expenses, non-comp expenses totaled $21 million in the first quarter, with $20 million attributable to the fund segment and $1 million to other operations. Our non-compensation costs declined 9% sequentially, driven principally by lower occupancy, insurance, and business development expenses were partially offset by higher professional service fees. Non-comp expenses total 21% of management fees in the 2010 first quarter. We expect this ratio to be approximately 22% to 24% for the second quarter of this year.

As I have mentioned on prior calls, expansion of our business over time will lead to growth in our fixed expenses. However, the rate of that growth should continue to be more than offset by the increased management fees due to growth in assets under management that’s illustrating the scalability of our model and the potential for incremental margin expansion. I would also like to reemphasize that we don’t manage the specific expense ratios, but rather to the requirements of the business. We always focus on providing resources for a variable opportunity in relation to both the current and expected economic results of the business.

Our first quarter 2010 effective tax rate was 15%. the lower quarterly tax rate was principally due to the deduction for investing of RSUs, which increased during the quarter due to the increase in our stock price and the result and flow of those economics through our legal entity structure. We anticipate that our effective tax rate over the next two quarters will be in the range of 15% to 20%. As a reminder, our 2010 full year effective tax rate is subject to variables, which generally will not solidify until the fourth quarter of this year, such as the amount of incentive income we earned, the result and flow of revenue and expenses through our legal entity structure, and the effect that changes in our stock rates may have on the deduction from investing RSUs. As a result of these factors, our quarterly and annual tax rate may vary, sometimes substantially from our estimates.

First quarter 2010 distributable earnings were $49 million or $0.12 per adjusted class A share. As you saw in our press release this morning, our dividend for the 2010 first quarter will be $0.09 per class A share. As in prior quarters, we use cash to fund items related to the operation of our business. The most significant of these relates to withholding taxes to be paid upon divesting of RSUs.

With that, we will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Roger Freeman from Barclays Capital. Please proceed.

Steven Truong – Barclays Capital

Yes, good morning. It’s Steven Truong here for Roger. Could you talk a little bit more about the shift from the global special to the Master Fund and the relative investment opportunity and why – just some color as to why the shift, please?

Dan Och

Absolutely. First of all, in terms of the numbers, as I said, it was approximately $714 million out of $1.5 billion, so roughly half. That money remains subject to the same lock-up and other general terms and conditions. It was really done for two reasons, number one, it’s a representation of the view the partners have that the opportunities in the liquid multi-strategy fund are compelling and are likely to remain compelling as well as the added benefit that has further aligned in our interest with fund investors, who as you’ve seen are investing more of their capital in the Master Fund.

Steven Truong – Barclays Capital

Okay. Thank you. And then, I'm just wondering on the expense front, you talked a little bit about our growing capacity for AUM, perhaps you can talk about expense growth trends going forward as it relates to, say, head counts and the non-comp as well.

Joel Frank

Look, I think the important thing is that we managed the business to what it needs as opposed to ratios or anything else. And of course, the scalability of the business is I think is important because as assets grow, management fees grow, and that more than covers the increased expenses. And as the business grows, as I said before, we will support the business. We'll support our fund investors and whatever the business need, but again, not the specific ratios, but more to what the business requires.

Steven Truong – Barclays Capital

Okay. Thanks.

Dan Och

As a reminder, when assets dropped, we were very clear that we were not managing to an expense ratio. We were running the business and its resources to do the right thing for the fund LPs. So therefore, as assets are rising, there was some benefit to that.

Steven Truong – Barclays Capital

Okay. Thank you. And then lastly, just in terms of the flows, the pace normally seems to be healthy going through the year. And can you talk about how has that been facilitated by the removal of the one-year high watermark condition? And can talk about the pipeline going forward, perhaps? Thank you.

Dan Och

The removal of the one-year high watermark has not been a significant factor. That was just one of the – it was just one of a number of things that we’ve done over the years to align our interest with the fund LPs. It’s just generated by many things we’ve discussed in the past. We think that investors – number one, they’re returning to the States. Number two, they are more focused than ever on other manager selection. Number three, it’s not just track records, it’s also – it's risk management. It’s infrastructure. It’s transparency. We believe the fact that we didn’t change the liquidity terms on any of our fund investors during the period – during 2008 or 2009, or any of the time period was relevant as well. It's all the things that we’ve mentioned in the past and the consistency of performance in the organization.

Steven Truong – Barclays Capital

Good. Thank you.

Operator

And your next question comes from the line of Dan Fannon from Jefferies. Please proceed.

Dan Fannon – Jefferies

Good morning. I wanted to talk a bit about new business of coming in the door and can you talk about the customers? Is this a broader or bigger allocation to alternatives or they are moving money around, you think ,within in a more liquid strategy or away from private equity? I'm just trying to get a sense of how you – as allocation pies are changing for some of your clients.

Dan Och

Well, if you look at the numbers for the industry as a whole and some of the studies being done to the industry as a whole, I think it's fair to say that there's more of an interest on some pension funds. There’s more of an interest from the large international entities than there was, let’s say, five years ago. I think that’s an industry shift. And we certainly are participating in that shift. So we think that the – the quality of the investor, the intended longevity of the investor, the diversification in terms of type of investor as well the geographic diversification, we feel very good about all that.

Dan Fannon – Jefferies

Okay. And then, as you look at all the regulatory debate that's going on, can you highlight for us what you guys are focused on in terms of potential changes to your business, both risks as well as potential opportunities?

Joel Frank

Look at it on top of everything that you read and basically notice things in it that you do. As things are passed, as legislations pass, we’ll deal with it. But that's our focus. And of course, as you said, there’s a lot going on and a lot you read. Things change everyday. But it's going to – until there's something specific that’s legislated or anything specific that's passed, we'll stay on top of this, but we know as much as you do.

Dan Fannon – Jefferies

Okay. Thank you.

Operator

And your next question comes from the line of Bill Katz [ph] from Citigroup. Please proceed.

Bill Katz – Citigroup

Thank you. Good morning, everybody. Maybe on that last question, maybe your answer is to be determined still. But (inaudible), it gives a little sense of where the legislation stands on carry interest, and then the extent that there would be any changes. I wonder if you could talk about little bit strategically about how you might, if at all, address compensation.

Joel Frank

I think Bill, again, I think my answer is going to be, we’re going to have to see what the legislation is. There’re all different rumors. There’re all different pieces of information. We’ll react to it when we actually know there's something that is actually legislated.

Daniel Och

There are some things in the legislation that are potentially positive. There are some things that are potentially negative. We do think one thing is very important is from what we see it doesn’t seem to be anything that inhibits our ability to perform for the fund LPs, which is obviously what is – continues to our to be our major focus.

Bill Katz – Citigroup

Okay. Second question, and maybe you (inaudible) in your own commentary. But I'm curious, if you look on your assets in total, I’m just wondering if there are any capacity constraints we should be thinking about. Obviously, with more money going to the Master Fund, I will – the Master Fund, I will presume that the answer is no. But just to think about either in the US by some of the sub products that drive the Master Fund or even geographically, should we worried about any site issues?

Dan Och

Well first of all, I’ll remind you that our assets – our assets, they get substantially higher levels than this that we did not have a problem generating returns at that time. In addition, as I a mentioned during the opening comments, this time period is interesting in that the diversity of the opportunity set is in many ways is larger than it has been historically. It is unusual in that given the de-synchronization in the global economy, given the fact that there are many industries and companies doing well while the others are still suffering the effects of over leverage and the difficult economy, there’s both a lot to do in the growth-oriented areas of our investing business, such as merger arbitrage and equity restructuring. At the same time, there’s a lot to do in the dislocated assets area, such as distressed and structured credit.

We also believe that the de-synchronization globally makes our international investment capabilities even more differentiated. Having large numbers of people on the ground having been there for long periods of time is even more differentiated at these times. So as you’ve seen from the diversification of the portfolio, there's no area. Our multi-strategy approach and our diversification puts us in a position where there's no area. And perhaps it would be a good idea for Joel to run through those allocations and give you a sense of the diversity.

Joel Frank

Sure. Master Fund, long term equity is about 37%, convertible arbitrage is about 18%, structured credit about 15%, private investment 10%, credit or distressed credit another 10%, merger arbitrage about 6%, and cash and unencumbered capital 4%.

Bill Katz – Citigroup

Okay. Just one last question, again maybe it’s too early to tell, but to the extent that today legislation that would affect a bank's abilities to own proprietary trading and other type of alternative asset managers, where are you strategically in thinking of bolstering your franchise via acquisition? Or is it just that the internals are so strong that you’re not looking at anything that might be more distracting?

Dan Och

Well, as Joel said, in terms of the legislation, obviously, we're going to wait and see what, if anything, develops, and we’ll make the appropriate decisions at that time. The other thing I'd add, Bill, on your last question about on opportunity and capacity, I do want to point out that the partners, the firm did just move $714 million of their capital to the multi-strategy funds. So that clearly expresses their belief about the ability to generate new terms of the fund LPs.

Bill Katz – Citigroup

Of course. Okay. Thank you very much.

Operator

And your next question comes from the line of Marc Irizarry from Goldman Sachs. Please proceed.

Marc Irizarry – Goldman Sachs

Great. Thanks. Hi, everyone. Dan, can you just give us the breakdown of the fund investors? What are you seeing? And also, what are you seeing from fund-to-funds as a percentage of your total assets? And Maybe you can give us a sense of the mix of LPs in the front

Joel Frank

Yes, let me – why don’t I get into that for you, Marc? Pensions are about 25%; fund to funds' about 21%, foundations are down at 17%; corporate institutional about 12%; our capital, the partners’ capital's at around 10%; family office, high net worth about 8%; and, private bank about 7%.

Marc Irizarry – Goldman Sachs

Okay. And then, Dan, can you talk maybe about the funds-to-funds business broadly versus direct investing into hedge funds? Are you seeing any changes there that suggest that maybe your multi-sharp model is taking some share as what would have been – it maybe fund-to-funds assets in the past?

Dan Och

Sure. Look, from what we're seeing (inaudible) and from what we’re reading, I do think it's fair to say that there's a general trend among some of the larger investors to look at investment directly into managers, walk into – or met their fund-to-funds. So that's part of the natural evolution. I will say that all fund-to-funds experience maybe different from others in the industry. We feel very strongly that the 21% of our investors represented by the fund-to-funds that we deal with are a very high quality group of institutional investors.

This funds-to-funds, I think they're very professional. We are impressed by the level of due diligence that they do. We believe, from what we see, that they add value to their investors, which is ultimately what's important to their business. So I do want to be clear that we can answer the question in general about fund-to-funds in some of the issues that they have. But I do not want to be clear that we believe that the fund-to-funds investors did not sit in general are very high quality organizations that represent strong relationships for us.

Marc Irizarry – Goldman Sachs

Okay. And then, just back to the global special investments fund for a moment, what were the redemption features for LPs in the – in that fund? And what's the third party capital that you have there now?

Dan Och

We generally don’t give that kind of detail, Marc, to be honest with you.

Marc Irizarry – Goldman Sachs

Okay.

Dan Och

But Marc, I do think it's better to say conceptually, you've seen the numbers the investors have indicated that their preference is to invest in the liquid multi-strategy funds. Or if they're going to invest on the private investment fund to invest directly in a platform with a specific area. That’s something we started talking about on the time of the IPO. And we believe it’s still intact. So you’re observation that the special investment fund did not grow as much as one they have anticipated several years ago, is correct. But it's because investors have decided to be more targeted.

Marc Irizarry – Goldman Sachs

Okay. And then, just along those lines, the investment opportunities, obviously, have been versus now, can you just talk maybe about the things that you saw in the special investments platform? Are you seeing them, the investment opportunities, more widely available in liquid form, be it African resources or whatever, some of the investments that global special investments had ahead of it, are those now more widely available in more liquid areas? Or is it – or are those opportunities just being made in the liquid portion of the Master Fund?

Don Och

Well, I think there're two factors that are relevant. Clearly, the partners do see very strong opportunities in the multi-strategy – in the Master Fund, hence, the allocation of the approximately $700 million to that fund. On the special investment side, this really isn’t – on the investment side, it’s not really a change from what we’ve been talking about. I mean, since the time of the IPO, we’ve been saying that our view is that the private investment platform should be more targeted. We identified certain areas, real estate, energy, and alternative energy, and other certain geographic regions. We remain committed to those, clearly, as we’ve said. That investment process is a longer process not just for us, but also to any involved in the private investment side. But we remain committed. Our focus is on areas where we see the opportunity to generate very strong returns and want to put our own capital as believed, and that has not changed.

Marc Irizarry – Goldman Sachs

Okay, great. And then, Joel, just on the management fee tax rates, will you still be assuming 35%? Or given your guidance for the next couple of quarters, are there some lower rates on management fees that we should be expecting in terms of tax?

Joel Frank

Yes, I think the guidance I gave was 15% to 20% for the second quarter. And obviously, as we've said before that – there're a lot of things that affect that, which is the RFU investment and the price of the stock now close to the model. But the 15% to 20% was what I said previously.

Marc Irizarry – Goldman Sachs

And what about for next year, what sort of more normalized rate to expect?

Joel Frank

It's too early to tell next year. Again, a lot of it depends on variables that we can't even predict until the end of this year. Never mind next year, so.

Marc Irizarry – Goldman Sachs

Okay. And then Joel, just headcount in the quarter.

Joel Frank

Yes, it was 382 people in total.

Marc Irizarry – Goldman Sachs

Okay, great. Thanks.

Dan Och

Thank you.

Operator

And the next question comes from the line of Ken Worthington from JP Morgan. Please proceed.

Ken Worthington – JP Morgan

Hi. Good morning. Just a follow up on March question, can you help us with a roadmap on helping predict the tax rate? If the share price is up 20% that drops tax rate down if share count falls, just a little more detail. So even though you guys don't have the metrics, at least we can make our own bets to help us with the model.

Dan Och

I think the key point, Ken, to keep in mind are, as I've said before, the things that are going to affect the model are going to be the RSU vesting, the prices, the stock, how close to the model, and various other factors. I think the information I've given you is our best estimate and I think that's what you should use.

Ken Worthington – JP Morgan

Okay. And this is maybe a little pie in the sky, but asset level about $25 billion now. You guys should peak that in the mid-30s. When you were at the mid-30s before, anything that you wish you had done to make the business more effective at these higher asset levels that you're playing and implementing over the next couple of quarters given that you're small, but you're on your way back – smaller, but on your way back to a much being bigger AUM-based company? That makes sense?

Dan Och

It does. I mean we're always focused on generating the best returns and investment ideas. We're always focused on growing the business intelligently in order to further enhance our ability to generate those returns. So whether it's international growth or growth by investment discipline, that's always been our focus. One thing we're very proud is that we maintained that focus even when assets dropped. We maintained our focus to our international platforms, while some others retrenched. We added on the investment side, structured credit was an area we were not in that we added to. We continued to hire where appropriate. As a reminder, we don't target on assets on a management level. Let's be the best we can be for the fund LPs in every way, shape, and form, then that will drive the asset on a management level.

Ken Worthington – JP Morgan

Okay. Fair enough. And then lastly, a number of reports go, two, three, four. And there was a lot of talk about pricing pressure, and customers, and some which – I think or even your customers were in the press talking about, "We're going to renegotiate these fees down." Now, your performance has been great. You acted well for investors during the downturn. Are these conversations still are – investors still putting pressure on you guys to lower fees? Obviously, your fee rate is stable, so nothing has happened. But on those conversations, at least are the asks still occurring?

Joel Frank

We haven't seen that type of pressure as to the conversations primarily about manager's selection. As we mentioned in the past, the only significant conversations we had on that front were in relation to investors committing to a three-year lock-up as opposed to just a change in the current terms. So we're pleased to say that the focus seems to be on managers' selection. And we believe that's where it's going to stay.

Ken Worthington – JP Morgan

Okay, great. Thank you very much.

Operator

And your next question comes from the line of Cynthia Mayer from Banc of America. Please proceed.

Cynthia Mayer – Banc of America

Hi, good morning. I guess this is a follow-up to that last question, how – what are your assets now with the three-year lock-up and how popular has it been?

Joel Frank

Yes, we generally don't disclose that. But we've been pleased with the interest in that particular tranche.

Cynthia Mayer – Banc of America

Okay. And you continue to offer that I guess?

Joel Frank

Yes.

Cynthia Mayer – Banc of America

Okay. Also within the Master Fund, can you give us a sense on how much is invested in the US versus overseas, and just remind me how you manage currency and how actively you use currency for return?

Joel Frank

Okay. Let me give you the breakdown geographically. It's 57% US, 28% Europe, and 15% Asia. And in general, we generally hedge out the currency exposure for the funds.

Cynthia Mayer – Banc of America

Okay. And it seems like the Master Fund's attracting funds faster than the narrower Asia or Europe funds. And I'm just curious how you see – what role you see those playing and who those appeal most to?

Dan Och

Well look, we both consider them to be extremely important. I do want to remind you that all the European and Asian funds are our alternatives we offer to investors to invest directly. So the platforms are really set up to provide the opportunity for the Master multi-strategy Fund as well as to the extent an investor wants to invest directly. Despite the substantial decline in assets under management in both the European fund and the Asian fund in 2008 and 2009, we did not reduce the resources at all in line with that reduction. We maintained full focus and full commitment. So it's really just effectively a fee that's available if the investors decide to allocate that way.

Cynthia Mayer – Banc of America

Okay. And last question, I'm just wondering what you see in terms of sovereign well funds because it seems you are mentioning clients like pension funds and endowments more. Is there any shift in – or decrease or increased interest from sovereign well funds?

Dan Och

I think in general, I think it's fair to say that sovereign well funds are – they're becoming larger and more significant to investors in alternative investment class. We've been working very hard for a number of years. I think the fact that we're already investing in many different geographic regions, that's very important. We build our geographic regions. You look at our history, I've always felt that geographic regions to be investors. And that means two things. That means it's designed to benefit the current fund LP. And it means we've built a reputation in the region, and then invest and often closed from that. So we do feel good about that area as a source of future growth.

Cynthia Mayer – Banc of America

Okay. Thank you.

Dan Och

Thank you.

Operator

And your next question comes from the line of Robert Lee from KBW. Please proceed.

Robert Lee – KBW

Thank you. Good morning, everyone. Most of my questions were asked, but just one last one. With the hedge fund industry entering a new positive cycle, obviously, a lot of your competitors have filled, those that still exist, except for the larger ones. Are you starting to see a more competition for – or more pressure, whether it's people trying to hire away some of your talent, whether it's on the investment side or even the market and distribution side? Are you seeing any evidence of that in the industry as, I guess I'll call it, a preferred manager over the years?

Dan Och

Well, I think we've always had that. If you look at our business model is it's to hire, train, and retain the best people, if it's to give people access to the full resources. I think we've been clear from the beginning that we believe we have the best team in the world doing this. Part of that is to understand that we should expect our people to be desirable to others. And so, even during the time period that you're referring to, where perhaps that wasn't going to occur, we always assumed it was still there. So we haven't seen any substantial change in that front. But we like to think that we don't wait until there's a problem to react. So whether that's the diversity of the ownership, the expansion of the executive managing director and managing director roles, the employees' stock ownership, things we've done in terms of compensation and promotion, that's the same answer we would have given you five years ago or three years ago, and today.

Robert Lee – KBW

Okay. And maybe on a similar topic, the last year, you took advantage of the dislocations out there, I believe, to hire some personnel to step up some new investment platforms. I'll use the word upgrade, although I tend not to like to use that word. Do you feel like right now, given that you're pretty well on the investment side while you're always looking for – maybe that incremental person can add value. You're pretty much where you need to be maybe you can – as you can them grow assets, it's really just – you really see the need to add much in the way of headcount, whether it's on the distribution side or investment side.

Dan Och

I think in general, that's fair to say. You look at our headcount now. You look at our headcount and resources went out to peak. But most importantly, as you all said, this is not about managing to an expense level. We are always, always focused on bringing in very good people, senior, junior, mid level, domestic, international, new business, old business, that will never change. That is always a focus here, and that will never change.

Robert Lee – KBW

All right. Great, that was it. Thank you very much.

Dan Och

Thank you.

Operator

And now we have a follow-up question from Roger Freeman from Barclays Capital. Please proceed.

Roger Freeman – Barclays Capital

Hi, good morning. Just two questions, one is just bigger picture question around the need – the desire for transparency – greater transparency across financial services and how you think your position, particularly the public company and the higher transparency standards that holds you to, do you look at that as this new world order giving you a material advantage over competitors as you are now already in front?

Dan Och

We do. We think that we've always tried to be proactive about being transparent. We constantly hold our investors who are – ideas and things that they're looking for. And I think that even if we were still private, we'd like to think we'd be amongst the leaders, if not the leader in that area because we've been proactive. But there's no doubt that as a public company, the additional disclosure and other involvement does create a sense of stability that adds to that.

Roger Freeman – Barclays Capital

Okay. Great. And I may have missed this earlier when you talked about. But in terms of reallocating some of the capital out of the special investments fund, just going back to what you had originally said, it's the time of the IPO that – I believe one of the reasons that you were putting money into this was to get it to a size where you could attract more external capital. And so, I guess I just wanted to ask how you are thinking about that now?

Dan Och

No, the goal was to have the capital to invest in our private investment platforms, number one because we saw such an attractive investment opportunity; number two because we felt that was a great way to align interests with investors as we develop these new platforms. That hasn't changed at all. As we've said over the past couple of years, the development of those platforms, probably as is the case with oil late 2007 plans in the financial world, the development of those platforms has been a little slow than we anticipated. It is in motion.

As we mentioned earlier in the call, we did just have a closing of the second real estate platform, and so things are in motion. But we made a decision based on the fact that that process was slower, how strongly we felt about the opportunities on the multi-strategy side, an added benefit that have further aligned our interest given where investors are putting capital. But we are still – we remain committed to the private investment platforms in the same way, shape, or form that we've made clear over the past several calls .

Roger Freeman – Barclays Capital

Got it. Actually, just one another one I just thought of, just quickly on the comp expense in the first quarter, just conceptually, it's down a bit year-over-year despite a year ago having high watermarks still hanging your head as you were to starting accrue – thinking about the four-year basis. I just want to get your thoughts on why it was actually down.

Joel Frank

Slightly down. And don’t forget, if you’re looking at total comp, the guaranteed bonuses was where the reduction was, not the salary expense.

Roger Freeman – Barclays Capital

Okay. So it’s really because you did take advantage in terms of hiring last year. So that’s really the way to think about – about that hire.

Joel Frank

Exactly.

Roger Freeman – Barclays Capital

Okay. Great. Thanks.

Dan Och

Thank you.

Operation

That concludes the question-and-answer session today. I will now turn the call over to Mr. Och for closing remarks.

Dan Och

Thanks, Maj. Before we conclude today, let me take a moment to briefly reiterate three points that we believe are important to understanding our future growth potential. First and foremost, we are well-positioned to generate strong, risk-adjusted returns, both now and in the future. The current investment environment is unique in the breadth of the opportunities it presents, which plays to the strength of our investment processes and international capabilities.

Second, our multi-strategy, multi-geographic approach positions us to continue extending our track record of generating strong risk-adjusted returns on all the capital that our investors have invested with us and create increased additional capacity to grow assets under management.

And third, we believe that the capital inflow cycle is underway in the hedge fund industry, and that we have been a leading beneficiary of those inflows over the last six months. We expect that trend to continue, leading to additional growth in our assets under management.

With that, Joe and I look forward to updating you on our growth and progress as we move through this year. Now, let me turn the call back to Tina.

Tina Madon

Thanks, Dan. Thank you, everyone, for joining us today and for your interest in Och-Ziff. If you have any questions, please don’t hesitate to call me at 212-719-7381. Media inquiries should be directed to Steve Bruce at 212-371-5999.

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