Sculptor Capital Management Inc (SCU) 2008 Q3 法說會逐字稿

Welcome to Och-Ziff Capital Management Group's 2008 third quarter earnings conference call. My name is Francis, and I will be your coordinator for today. At this time all participants are in a listen-only mode. All lines placed on mute to prevent background noise. (OPERATOR INSTRUCTIONS)

I would like to turn the call over to Ms. Tina Madon, head of Investor Relations.

Great. Thanks, Francis. Good morning, everyone. We appreciate you joining us today. We me are Daniel Och, our Chairman and CEO, and Joel Frank, our Chief Financial Officer. Dan will review our 2008 third quarter business results and Joel will take you through the details of our quarterly financials. After that we will take your questions. I would like to remind you that today's call may include forward-looking statements. These statements reflect the current views of management with respect to among other things, future events and financial performance many of which by their nature are inherently uncertain and outside of our control. 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 certain financial measures which are not prepared in accordance with US generally accepted accounting principles. A reconciliation of our nonGAAP measures to the most directly comparable GAAP measures is available in the earnings release which is posted on the for shareholders page of the website. Furthermore no statements made should be construed as a offer of any Och-Ziff fund. Today's call is being recorded and is copywrited material of Och-Ziff Capital Management Group LLC. Telephonic and webcast replays will be made available later today. You can find the details on our website at www.ozcap.com. Now let me turn things over to Dan.

Thank you, Tina. Good morning, everyone. And welcome to our call today. I will start by sharing our perspective on the implications we see for our firm resulting from the broader challenges faced in the hedge fund industry. I will then discuss our results for the quarter and spend time on the factors we believe are important to understanding the differentiated value of the Och-Ziff Capital business model. Lastly I will briefly review the progress we are making on the private investments business.

As you all know global market conditions were unprecedented during the third quarter particularly in September. And these conditions worsened in October. Against this backdrop we managed our business as we have always done with a consistent and disciplined focus on preserving fund investor capital, relying on the risk management processes which have been integral to our approach throughout our 14 year history. While our fund investment decisions and returns are shaped by the broader environment we have been always been careful to manage our risk exposures and allocate capital in a systematic and thoughtful way. We are confident that the structure of our business positions us not only to successfully navigate these tough market conditions, but also to capitalize on the investment opportunities that will arise from this environment and lead to earnings growth for our firm. The third quarter September in particular was one of the most difficult on record for the hedge fund industry characterized by operating conditions that are driving substantial consolidation. October proved even more difficult than September. While in the short-term we may not be immune to the impact of some of these conditions we are confident that in the long run the secular growth drivers remain intact for larger firms like ours that have continued to consistently deliver performance.

We believe this for the following reasons. First, institutional investors will continue to allocate a portion of capital to leading alternative asset managers. We anticipate that as the capital markets normalize and confidence improves institutional investors will review alternative asset manager as essential to diversify their investments and enhance their returns. Second, the anticipated hedge fund industry consolidation should result in market share gains for the larger well established firms that have the necessary infrastructure and institutional orientation and have been able to demonstrate the value ask sustainability of their businesses throughout the crisis. Third, fund investors understand that we generate risk adjusted returning without the extensive use of leverage which are not based on data only or significant directional bets. Year to date through the end of October the OZ Master fund has outperformed the S&P 500 by 20.8 percentage points. Fund investors recognize the value of that type of performance in such volatile markets.

And fourth, we have always focused on building and an enduring franchise in addition to generating strong investment performance. This mindset is at the core of how our business is structured deep culture we have and the cohesiveness of management team. We believe the attributes of business model positively differentiate our firm within our industry and position us for strong growth as the markets recover. Now let me review our third quarter business results beginning with our funds investment performance. As part of this discussion I will also review October performance. Year to date through October 31st, our master fund was down 12% net, our European master fund down 13.1% net. Our Asian master fund was down 26.7% net, and our global special investments master fund was down 5.4% net. This performance was driven primarily by the declines we experienced in all funds in September and October. Since the market dislocation began 15 months ago, we have experienced low volatility in our investment returns despite the prevailing environment. This changed in September and continued in October.

Market volatility reached record levels and the flight to quality had a greater than expected and historically unprecedented impact on virtually ever asset class globally resulting in substantial declines in values. Although we were conservatively positioned and fully hedged throughout September and October, as we have been since the crisis began, the unique combination of these factors made hedging less efficient both within and across investment strategies. However, we remain a leader in the return space and significantly out perform major markets worldwide during September and October and year to date through October 31st. For the year to date period the S&P 500 was down 32.8%. The FTSE was down 29.5%. The Nikkei down 43.1% and the Hang Seng index down 48.4%. As another point of comparison, an analysis you have previously heard me use to describe our performance. The S&P 500 was down seven of the 10 months so far this year with a cumulative total return for the negative months of minus 44.7%. Investors who are the OZ Master funds during the same time period experienced a cumulative net return of minus 13.9% or 30.8 percentage points higher than the S&P 500. While the volatility of our returns was greater in September and October, I would like to emphasize several very important attributes that distinguish our firm within the industry.

First, our fund investors highly value the magnitude of out performance both on an absolute basis and versus the broader market indices. They continue to confirm this in our ongoing conversations with them. Second, as you know many hedge funds have experienced performance declines that have substantially disappointed investors in recent months. In response some of these funds have had to adopt a more active risk management mindset including the reduction or elimination of their use of leverage. Minimal use of leverage and active risk management are hallmarks of the way we have always approached our business. And third, our risk management methodologies have never been based on a model driven black box approach nor have they ever been a function of trying to repredict the market. To illustrate let me give you an example.

In June 2007, long short equity restructuring represented 67% of the NAV in the OZ Master fund. Beginning in July 2007, we took a view that this strategy would not be as attractive going forward. We felt that there would be more basis risk in a volatile environment, and more risk to individual company performance. While we did not predict the severity of the ultimate market outcome we consistently and systematically reduced our long short exposure through the remainder of 2007 and throughout 2008 to 22% of NAV as of September. This is similar to the discipline that led us to reduce exposure to credit assets to just 2% of NAV, prior to the start of the current crisis in July 2007. The key is that in neither case did we try to predict the market turn or it's magnitude nor allocation decision made automatically by a statistical model.

We apply the same combination of qualitative and quantitative analysis, investment experience, asset allocation methodology and systematic thoughtful discipline as we have throughout our history. We have remained flexible and nimble on how we allocate capital and [town] within our business. In addition our partners many of whom have been together for 10 years or more have a deep base of business experience that has proven invaluable in navigating these market conditions. We believe that our methodologies and preparedness in this environment protected capital and left news a very liquid position to capitalize on new opportunities as they arise.

Now let me turn to assets under management. As of October first, our assets under management totaled $30.5 billion which included $719 million of September redemptions net of October 1st capital inflows. This morning we announced our November 1st assets under management of $28.3 billion, which included an additional $220 million in net outflows. There's results clearly affect that the pace of redemptions increased as investors globally rebalanced or reduced exposures given the extent of the market dislocation. We believe that redemptions for the hedge fund industry globally will likely stay elevated while market conditions remained unsettled. Our more than 700 fund investor relationships globally are virtually all institutional and many with us for a long time. We maintain close contact with them to help them understand the impact of market events as they occur.

Nonetheless, we are not immune to additional redemptions from funds regardless of our performance. We believe however that our success in preserving investor capital together with our strong investment performance positions us to experience lower redemptions than the hedge fund industry as a whole and to gain a greater share of new in flows as the markets stabilize. Now for a quick update on private investments business. We continue to make progress with building out the platforms we have discussed on prior calls. For example, we completed the first closing of our Africa joint venture in early October with a initial third party capital commitment to the fund of $200 million. We remain patient and cautious in our approach, but continue to believe these new platforms can offer very attractive rates of return over time. Let me hand the call over to Joel to take you through our quarterly financial results.

Thanks, Dan. The focus of my remarks today will be economic income and distributable earnings. We use economic income to measure the pretax operating performance of our core business, distributable earnings measures the after tax performance of this business and helps us determine the earnings available to distribute to shareholders. For the third quarter 2008, we reported a GAAP net loss of $69 million, or $0.94 per basic and $1.07 per diluted class A share. For your reference, a discussion of our GAAP results contained in our press release. Let me now take you through the components of economic income, beginning with revenues. Management fees $148 million, 2% higher than the second quarter of this year. Our current average management fee remains approximately 1.7%, which is a blended rate that includes the effect of our nonfee paying assets. Assets under management decreased by $3.2 billion from June 30 to October 1st, due to both performance related asset depreciation of $2.5 billion and then outflows of $646 million, which includes $73 million of net inflows for July 1st through September 1st and $719 million of net outflows on October 1st. As a reminder, the majority of our redemptions occur on quarter end. All redemptions are paid on the first day of the following month and capital inflows for that month accepted on the same day.

Operating expenses are comprised of compensation and benefits and noncompensation costs. Our third quarter 2008 compensation and benefits totaled $29 million. Of this amount, salaries and benefits $17 million, essentially unchanged from the 2008 second quarter. Third quarter compensation and benefits also included $12 million of bonus expense. The majority of this amounts relates to accrual for bonus guarantees which we will pay at year end. In the 2008 third quarter, salary and benefit expense was 11% of management fees. With no asset growth, approximately 12% to 15% of annual management fees remains a good proxy for our salary and benefits expense. Noncomp expenses for the 2008 third quarter were $30 million, 4% higher than the 2008 second quarter. This sequential increase was due principally to higher occupancy and technology costs partially offset by lower professional services expenses.

In the 2008 third quarter, noncomp expenses were 21% of management fees. With no asset growth, we expect noncomp expense to remain approximately 18% to 22% of annual management fees. Economic income for the third quarter 2008 was $94 million, essentially unchanged from the second quarter of this year. Distributable earnings for the quarter were $54 million or $0.14 for adjusted class A share. As we approach year end, I'd like to remind you that our tax rate in the fourth quarter will depend on the amount and flow of revenue and expenses through our legal entity structure. Although at this point in time, we anticipate that our full year affective tax rate will be close to that of the first nine months of this year, the fourth quarter rate will be reduced by the tax deduction resulting from the vesting of RSUs granted to employees in connection with our IPO. The size of this deduction will be a function of our stock price on the date the RSUs vest. Our third quarter 2008 dividend is $0.025 per class A share.

This quarter, we retain cash to give us greater flexibility to act on the opportunities we see arising in the alternative asset management space. These actions position us to increase the growth potential, and diversity of our business thereby increasing returns to our class A shareholders. Before closing, I wanted to review our approach to planning for the 2008 compensation. In a typical year we pay 12% to 15% of total annual revenues in bonuses at year end, which coincides with the crystallization of our incentive income and aligns compensation with the performance of the firm. However, we also believe that our ability to attract and retain world class talent is integral to realizing the long-term growth potential in our business. Therefore, while lower than 2007 levels, a certain amount of cash bonuses will be paid this year which will reduce our fourth quarter economic income, distributable earnings and dividend.

I want to close by emphasizing that we will always manage our business to maximize returns for both our fund investors and our class A shareholders. As a reminder our partners have the majority of their personal assets including the proceeds from the IPO invested in our funds and on the majority of the equity of the company, which closely aligns with the fund investors and class A shareholders. As a team with the current economic environment in mind, we will continue to focus on making prudent thoughtful investments and business decisions to sustain and build our franchise. With that we will be happy to take any questions you have.

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Roger Freeman from Barclay's Capital. Please proceed.

Hey. Good morning, Dan and Joel. Could we get the gross inflows and outflows for the quarter and also for leading into the first of November?

Sure. We generally Roger -- we don't give that type of detail, we don't break it down as you know. So again, if you look in the press release and you look in the material that we handed out you will get a since of the net numbers, but we generally don't break it down.

Roger, as a general industry matter that we're not substantial flows, gross inflows were extremely small.

Right.

And we were roughly around industry levels.

Okay. That actually is helpful. And I guess can you help me think about any forward redemptions, do you have indications yet for Q4 redemptions? What is actually the remind me the deadline to put the requests in for the following quarter. How far are we past when you last received the redemption request?

Sure. There were two deadlines, Roger, on November 15th and November 30th, depending on the specific traunch. We do not have final indications at this point in time and clearly if we did I couldn't predict without final indications. Our belief is that the industry is going through a difficult period. And for many reasons some related to performance in other asset classes, some related to investors need for liquidity due to other commitments that they have, as well as certain industry issues including performance by some funds that may have disappointed investors, including investors viewing some funds to be switching strategies generally from highly leveraged positions to less levered, or more directional to less directional. For all those reasons the industry will be under higher redemption pressure than it has been in the past. We are confident that we will be -- our redemptions will be lower than the industry average and our redemptions primarily a result of extraneous forces rather than Och-Ziff specific issues.

Okay. Do you have -- I don't believe you have gates in places is that correct?

We do not have gates if place.

So that probably does put you in a more likely position to your point that investors will be seeking liquidity because they can from you.

We think that the key here is who is going to come out of this in the strongest position. We think that a number of the things we have done for the past 15 years and continue to do including performance position us to have an even greater market share coming out of this cycle than we had coming into this. And we are focused on those long-term issues both to benefit our fund investors and our shareholders.

Got it. Okay. Just around managing the funds, can you give us a sense for how at least the master fund is positioned right now, maybe where -- what credit allocation is a percent of the portfolio and how much of the portfolio is in cash?

Sure. These numbers are somewhat fluid but the credit allocation is still approximately 10%. As I think we've made clear we have been extremely patient, so far that's served us well, we feel following the dislocations in September and October, several different areas have moved to where they're extremely attractive and anticipate being more aggressive. Cash position in the master fund is approximately 35%, and I want to be clear, that's something that we have been consistently growing cash position since July of 2007. That cash position is not in anticipation of redemptions. That cash position has been steadily and consistently established as we patiently analyzed the investment landscape and risk reward opportunities.

And just to add to that, when Dan is talking about cash he is talking about unencumbered capital.

Right. Okay. So that's 35% plus the 10% of credit, can you talk anymore buckets in that pie?

As I said our long short equity restructuring is approximately 22%. Special investments approximately 14% to 15%. Convertible and capital structure arbitrage in total -- and that's an area we have been expanding, that's an area we had been very very small in prior to the financial crisis, but it's an area we have been expanding. That's now by 13%.

Okay. Thanks. I will jump back in the cue.

Thanks Roger.

Your next question comes from the line of Hojoon Lee with Morgan Stanley. Please proceed.

Good morning. Dan, can you share what you're generally seeing in terms of redemption trends, maybe break that down by investor type, and by your different funds?

Be happy to. We to this point have not seen a lot of data in that area. I want to be clear. Our dates are November 15th and November 30th. I can comment on what we are hearing across the industry, but I want to be clear we are not getting specific data from individual managers and I'm not sure that what we are hearing is substantially better than what you are hearing. From our investors, and believe me, we are always in communication with our investors, you can guess in these types of environment we are in greater communication with our investors. What we are hearing is that they are extremely comfortable with our performance, they're extremely comfortable with our firm and our risk management processes. They are extremely comfortable that we are still doing what we have always done as opposed to trying to reinvent ourselves. So we believe that we will experience redemptions as a result of what happens in the industry.

We don't know the number, I don't think anyone knows the number, I think it's pretty clear they're higher than what people have seen historically, the key for us is to be lower than the industry average to make sure that when and if investors do redeem, it's not because they are dissatisfied with Och-Ziff as a firm or returns or anything else about what we provide, but because they feel they have to for extraneous reasons. We feel if we accomplish all of that, then both from those investors and from new entrance who will come to this marketplace. We want to remind everybody that prior to this financial crisis, there was significant lodging and expectation of new investors from several different areas, international and domestic, moving to alternative products, we saw this in the 2000 to 2002 period. We think if we can continue to perform when investors look back and see this type of outperformance, this type of preservation of capital, we think those secular growth drivers will come back and we think if we can stay focused we can be a market share beneficiary at that time.

Okay. And so just to clarify, broadly speaking, you're not seeing major differences between your institutional fund hedge fund investors or endowments or pension systems?

We are not, but just remember virtually all investors are institutional, even if they come through a fund of funds, our underlying investors virtually all institutional.

Okay. And just one follow up question, given what has been the challenging environment for growing assets and delivering positive performance fees, could you share our thoughts on what you see headcount going next year? Is this the right time for you to try to attract more talent or --

Well, Hojoon, what we will do in terms of attracting talent, of course where we see the opportunity and feel it's right for the business we will continue to hire. But we have no plans of managing headcount. We don't look to cut headcount. What we do is we manage the economics of the business and expect to create real value for our investors. That's how we manage the business, that could include hiring people or making adjustments to our business itself but it's always focused on return to the investors.

And let me throw in a comment. What I tend to see is the incoming calls those who want to be at this firm. I can tell you that I can tell you that today and prospectively we think we know we are seeing substantial opportunity in that area.

Okay. And just one question about distributions going forward. This quarter you announced dividends of about $0.025, so this is below the $0.11 you paid out last quarter despite slightly higher ENI. Can you help us bracket how to think about this in the coming year?

Sure. We will continue and as our policy has been to distribute essentially all our distributable earnings, where we feel retaining cash is more value to investors and they are comfortable with this philosophy, we will do that. We can -- it's unusual circumstances whereby we can take advantage of opportunities in this environment and I think it's very important that we focus on that and make decisions both our partners and along with our investors to use this cash in the best way possible to increase and maintain performance.

Okay. Thank you.

Your next question is from the line of Marc Irizary from Goldman Sachs. Please proceed.

Great. Thanks. Dan, obviously we are in a time of elevated volatility. And if volatility stays elevated and your risk management process continues to improve, is it possible that the level of losses that we have seen over the or the declines in the fund over last couple of months are not going to be equally offset by gains on the upside as you improve your risk management systems. Is there some asymmetry between the losses you experienced and potential gains?

Marc, that's not something that we are expecting, I do want to be clear, since inception, we have told funds investors and shareholders our goal is not to mimic S&P 500. Our goal is to generate steady consistent positive returns without correlation to equity markets. That remains our mandate, that remains our focus, quite frankly despite the historic dislocations in September and October, and it's ultimate impact on our performance, we continue to believe that is exactly where we are and where our focus will be.

Okay. So you're confident that when money does flow back to the industry that the your strategy has enough upside participation relative to where the money is going to flow back into hedge funds?

I don't want to talk about the hedge fund industry overall, but I can talk about Och-Ziff, as we look at the opportunities we see, we are seeing -- some of the certain of the sectors we are involved in are clearly at historic lows, creating extremely attractive opportunities and our performance in September and October not withstanding we think we are in amongst the most liquid positions of any fund and we are very excited about the opportunities we are looking at.

And then just in terms of new products and geographies, obviously Asia is down a good bit. Maybe some retrench maybe from that region in particular. Do you have any plans to change sort of the way you're thinking about the Asia master fund?

We have been clear with our fund investors that we are disappointed with the return in the Asian master fund. Having said that we are as committed as ever to the region, and to our team in that region. We opened in Asia in 2001. I believe we were the first global multi-strategy fund to open in Asia. We have four offices. We believed and continue to believe that Asia will be the largest growth region in the world for the next 10 years. We -- over the last seven years we've established significant relationships, significant structural advantages, we are as committed as ever to Asia as a region.

Can you just also talk about our prime brokage relationships and how you manage them through some of turmoil, and remind us the number of relationships that you have?

Marc, we have several relationships and what we do, we actively managed this before the turmoil and after. What we do is we try too diversify as much as we can. We will try to get the best terms in terms of legal terms, we'll look at the best geographies to maintain assets and a good portion of assets we maintain in custody accounts in our name directly. Because don't forget one thing important, we don't use a lot of leverage, and because of that we don't need to rehypothecate a good portion of assets. We protect them as best we can, I think that based on focus at the risk committee level and at the all levels of the firm, we will continue to diversify, we'll continue to stay focused on that and find any means to protect assets.

And just one more if I can. Just in terms of the comp accrual, Joel, is that all related to guarantees from new employees or is that also from existing employees, what's the headcount at the end of the quarter?

The majority of it is for new employees. Prior use for prior employees and headcount at the end of the quarter was 458

Your next question is from the line of Robert Lee with Keefe, Bruyette. Please proceed.

Good morning, everyone. Quick question, maybe we can flush out when you talk about opportunities, are you talking about investment opportunities or using the firm's capital to reinvest in one of the funds or are you thinking about from the business whether it be in acquisition or that of a team kind of perspective?

You're referring to the cash that we retained rather than paying out as a dividend when you asked this question?

Yes.

No that is not -- that is for investments in growing the business. So it is not for making investments in underlying assets on the invest. That is to be utilized to grow. That is shareholders money, where we made a decision along with the board that the right thing to do is to retain the cash in order to maintain the flexibility to maximize shareholder value over the long term.

Okay. And maybe a follow up question on the -- I know your debt is termed out, but just as you had some pressure on assets and performance fees clearly under some pressure, are there any type of debt covenants that we should be thinking about at this point in time, whether it relates to asset levels or performance fee generation?

No. And actually for our debt, there are no financial covenants related to that debt. So there is nothing that you need to focus on.

Great, thank you very much.

You're welcome.

Your next question comes from the line of Ken Worthington with JPMorgan, please proceed.

Hi. Good morning. Sorry to beat a dead horse, but on the dividend and the opportunities, is it just the desire to be prudent and raise cash, or do you think the current market environment with all the dislocation for hedge funds presents opportunity to buy assets and merge them into the funds? I think Robert asked about liftouts. Do you need cash to do the liftouts or do you think you will have the opportunity do liftouts? Are there specific things you have in mind or just being prudent?

It is primarily the latter. In other words, while there is nothing specific that we are working on at this moment, the opportunities that we expect to see due to the dislocation are likely to be substantial and dramatic and we made a decision that having that added flexibility combined with the stability of our firm, the attractiveness to be here that existed prior to this crises and all the other factors, made this the right decision. But it is -- as you phrased the question it is the latter.

Thank you. Then just picking on the Asia master fund, it does seem like an [outlier], is it just bad returns in Asia, so it's in a particularly challenging region at this point in time, or is there something else there either lack of resources? Is it something simple like the currency? Just trying to track down the fact that it's underperforming other funds by a significant margin.

Sure. Look, clearly the region, the region suffered the greatest losses of any region around the globe. So that is partially what is behind the performance. Having said that, we have very high expectations for ourselves and we felt that the decline in our portfolio should not have been as dramatic as it was. The bottom line is certain portfolio level decisions which include myself as the co-portfolio manager, certain portfolio level decisions weren't what they should have been. As we always do at Och-Ziff we are constantly analyzing our business forward we can be doing better and differently. We've made some modest changes to how we approach the portfolio. We believe those are in place. We expect to see them working going forward.

And also with regard to the Asia master fund, you indicated redemptions for October 1st, are those kind of coming in proportion to your spread of AUM, or are they more focused in any one fund like the Asia master fund because of the returns?

They are not focused on any one fund or any one region. It has been sporadic amongst the fund, so there is no -- nothing specific.

Okay. Great, thank you very much.

Your next question is a follow up from the line of Roger Freeman with Barclay's Capital. Please proceed.

Hi, I got a couple of follow ups, I want to come back to comps for a second and a since for how you think about bonuses in a year where you essentially have no incentive income. So to go back to one of the earlier questions, maybe if you could give us a sense or what percentage of bonus payments this year will be related to guarantees for new or existing employees, or for existing or there are no guarantees, year-over-year how do you think about a year-over-year bonus comparison?

Look, Roger, as you know, the bonus pool is discretionary and variable based on how the firm does. With that said however we value our employees and we value the franchise and some level of bonuses paid to the employees of the firm. I think it's very important to understand that the employee we value the employees, they are critical to our firm. And so there will be some level of that paid which alluding to your question will affect economic income, distributable earnings and the dividend.

Okay. And I guess with respect come back to the other questions, new hires, do you feel that you need more cash to bring folks on board, as the stock may be less of an incentive now than it was given where it's traded, or is your relative strength in the market more than offsetting that?

Our relative strength in the market has more than offset any of that.

Okay. I guess around the current environment, can you talk a little bit to the activity levels that you have been trading or the portfolio turnover? Because we seen a real fall off in market volumes over the past week or so, and yesterday was the slowest day since the day after Labor Day. We're hearing incrementally that hedge funds are not trading and I guess can you talk to your actual turnover rates?

Sure. There has not been a substantial change in our rate. As a reminder the portfolio, the cash position is higher than 15 months ago. But with us it's [arithmetic]. What you're referring to is a perception that will are several to many hedge funds that historically have been very highly levered, having incorporated model driven trading that is very active. Have been very large percentages individually and collectively of overall trading volume. I have -- it seems to be the perception they have modified their methodologies and/or slowed down, so they may be an effect you're referring to. But no change at Och-Ziff Capital.

Dan you mentioned the high [vix] levels as impacting the effectiveness of hedging what is a what level is -- what level is let's say extremely challenging or less, so i.e., is a vix at 54 or whatever it is yesterday a lot bter than the 80s or better than the 80s or way too high at these levels. How would you characterize it last week in terms of hedging effectiveness?

Sure. First of all I don't want to make a correlation necessary between the vix when I talk about volatility, vix is one measure, I really meant, I really referred more to the substantial dislocation or the breakdown between breakdown between historical correlations which we seen occur occasionally in the past. We believe that many of those correlations have returned towards more normalized rates. Clearly not back to the rates they had been at in low volatility environments. But we believe that the substantial, most of the substantial dislocation has passed.

Last question, I guess general thoughts around market opportunities now, we seen some improvements on the front end of the curve in terms of funding but economic weakness to work through and delevering and general lack of credit availability in the real economy. Do you view credit as a more attractive opportunity in general than equities going forward? Any other just thoughts about the opportunity set right now?

You have to remember as you go back to our funds investment mandate, steady consistent return with a strong focus on preservation of capital. When and if we are able to buy credit instruments, particularly first lien credit instruments with returns in the mid teens and higher on a cash on cash unlevered basis and substantial protection of capital, and when we are able to do that across many different asset classes, that is extremely attractive to us and to our investors. So that doesn't mean that when we look back credit will necessarily outperformed equities, but fair to say given our investment mandate, and how we approach risk reward, to the extent that credit markets offer those opportunities, that will be a major area of focus to us.

Okay. Thanks.

Your next question is from the line of Cynthia Mayer with Merrill Lynch. Please proceed.

Hi. I apologize if you covered this already. I got on the call a bit late. But to the extent you've had redemptions are they coming disproportionally from funds of funds or are you -- or are the redemptions basically in proportion when you look at your client mix.

They're mixed across the board, it's not from any one investor, same with the funds it's sporadic.

Okay. And just to follow up on the previous question on new hires. Given your low stock price, would you use a greater proportion of shares for new hires than you have in the past or do you just expect to use the same formula?

Given the supply demand that exists in terms of our ability to hire people, we think that we are in an extremely good position. We don't think we're going to be in a position where we are forced to pay more because the stock price is lower.

Right. Okay. And you may have covered this already, but in terms of your build out internationally, does the decrease in AUM change that at all in terms of your willingness to hire overseas and open new offices and that sort of thing?

No, we are as committed as ever, we think that the opportunities for our firm going forward are going be even greater than what they may have been prior to recent occurrences and to market events, and so we continue to focus on where and how we should grow.

Okay. Does it change the timing of what you want to do at all?

At this point, nothing has changed in terms of timing.

Great, thanks a lot.

And your next question is from the line of Marc Irizary with Goldman Sachs. Please proceed.

Thanks. Just two questions, one on the taxes. Joel mentioned that the tax rate in the fourth quarter is going to be dependant on the stock price, but what sort of range of tax rates should we expect -- or if you use today's stock prices as a proxy what will the tax rate look like? And then you had some incentive fees in the quarter, what were those related to?

To answer your first question, it's going to depend on the magnitude of the stock price. Obviously as I said previously, it will be lower, reduced from our normal rate. Again it's all going to depend on where we end up in terms of magnitude. In terms of incentive income, we will collect incentive income from withdrawn investors on special investments that we exit. So we solidify at a point in time when a investor withdraws so a small amount of incentive income that we collect.

Okay. Thanks.

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

Thanks Francis. There is no question we are currently operating under the most challenging market conditions we have ever encountered. Given this environment, I want to reiterate four points that I believe are very important to evaluating our company and our growth potential. First, the anticipated consolidation in our industry will likely be significant. However we firmly believe institutional investors will continue to allocate capital to alternative asset managers to diversify their investments and enhance their returns, these factors will drive market share gains over time in the larger well established firms such as ours that have the necessary infrastructure and institutional orientation and are able to demonstrate the valuable and sustainability of their businesses throughout the crisis. Second, we have an established track record of generating risk adjusted returns without the extensive use of leverage. That magnitude of our absolute and relative outperformance year to date differentiates us and is highly valued by our fund investors.

Third we entered the current crisis well prepared. We have a always managed our business with a disciplined focus on preserving fund investor capital, relying on the risk management methodologies which have always been central to the funds investment strategies. This discipline remained consistent throughout the market crisis which is also highly valued of the fund investors. These characteristics distinguish our business and are central to why we are a leader in the hedge fund industry. Fourth, market dislocations create substantial opportunities for investment globally. Our methodology and preparedness in this environment protected capital and leave us in a liquid position to take advantage of these opportunities. This flexibility enhances our growth potential and our ability to generate increased earnings and returns to shareholders over the long term.

And finally, throughout our 14-year history we have always focused on building an enduring franchise in addition to generating strong investment performance. While on the short term we may not be immune to some of the effects of current market conditions, we are confident that our business is well position to deliver differentiated value and strong growth over the long term. Joel and I look forward to sharing further updates with you in the future. And with that, let me now turn the call back to Tina.

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

And ladies and gentlemen, again, thank you for your participation in today's conference. This concludes the presentation, please disconnect and have a great day.