Sculptor Capital Management Inc (SCU) 2009 Q2 法說會逐字稿

Good morning, everyone, and welcome to Och-Ziff Capital Management Group's 2009 second quarter earnings conference call. My name is Ann and I will be your coordinator for today. As a reminder, this conference is being recorded.

At this time, all participants are in 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 Ms. Tina Madon, head of Investor Relations.

Good morning, everyone, and welcome to our second quarter earnings call. With me are Dan Och, our Chairman and CEO, and Joel Frank, our Chief Financial Officer.

Dan will give you an overview of our business results and Joel will take you through the details of our quarterly financial. After that, we'll take your questions.

I'd 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, 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. Actual results and financial conditions may differ, possibly materially from the anticipated results and financial condition as indicated in these forward-looking statements.

The Company does not undertake any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future development or otherwise.

During today's call, we will be referring to economical income and distributable earnings which are financial measures not prepared in accordance with US Generally Accepted Accounting Principles. Reconciliation 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 Website.

Furthermore the statements made during this call should be construed as an offer to purchase shares or any interest in an 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 Website at www.ozcap.com.

Now let me turn the call over to Dan.

Thanks, Tina. Good morning, everyone, and thank you for joining us today.

This morning, I will update you on our current priorities in our core business. I will also briefly review our assets under management as of August 1 and year-to-date investment performance, as well as the industry dynamics we are seeing.

During the second quarter we continued to deliver strong absolute returns and we extended that trend last month. Through July we have generated the best year-to-date return in our Master fund since its inception. Our goal is to continue to provide attractive, competitive and consistent returns to our fund investors. The quality and consistency of his performance is due to our stringent risk management process, our low use of leverage and our disciplined and focused investment approach.

More than ever, these attributes are critical to fund investors. They are also essential to our ability to grow assets under management and to increasing our market share.

On our last call at the beginning of May, I noted that we viewed the investment environment as an excellent one in which to pursue investment opportunities to generate strong asset returns for our fund investors. This was evident at the time by the solid first-quarter performance we achieved in all of our core funds.

The ongoing strength of our returns throughout the second quarter is reflective of our investment process and business model. As always, we will continue to take advantage of opportunities that allow us to generate consistent positive absolute returns within our risk tolerances and following the well-established investment discipline we have always used since our inception.

We believe that Och-Ziff is extremely well positioned to generate strong risk-adjusted returns going forward.

Our year-to-date performance also demonstrates the benefit of our multi-strategy approach. We invest capital based on the quality of the idea, regardless of asset class, industry sector, geography or investment strategy. We have a strong history of generating profits for our fund investors, because our highly diversified model enables us to capitalize on opportunities in any market globally, rather than being dependent on large directional moves in the markets broadly, or in any one particular sector.

The current environment presents unique opportunities because the recent dislocation has affected such a broad range of asset classes globally while at the same time, the competitive environment has become more fragmented. We believe that our multi-strategy model supported by our robust infrastructure is well positioned to generate strong risk adjusted returns over the next several years.

During the second quarter, we also continued to focus intensely on our fund investors. We are not only deepening our existing relationships, but also developing new ones with investors who we believe could represent meaningful growth over time for our core funds and our private investment platforms.

Capital flows are very slowly beginning to return to the industry; and it may still take a while for them to become meaningful. Institutional investors continue to have residual liquidity needs and are also taking time to assess how they will rebalance their portfolios and reinvest their capital.

However we have an active dialogue with both current and prospective investors, as this is an area of the business that we are extremely focused on. The quality of these discussions and the level of interest in Och-Ziff are very high.

We believe that the most important factor about future capital inflows is not the exact timing of when they begin but rather the quality and aggregate size of those flows over time and the corresponding market share we are able to attract. We remain confident that, as investors redeploy capital to alternative investments,we will be a leading beneficiary of those blows because of our track record, infrastructure, transparency and the consistency and sustainability of our business.

We also believe that a significant differentiation continues to occur among alternative asset managers, and investors understand more than ever the importance of manager selection. Institutions will incorporate their experiences with individual funds throughout the financial crisis into their decision-making and its plays towards strength.

Now let me turn to our business results beginning with assets under management. As we announced this morning our assets under management as of August 1 were $21.5 billion which includes $1.3 billion of second-quarter redemption request that were paid on July 1. Our redemptions continue to trend downward as market conditions stabilize further.

We believe that our second-quarter redemptions were due not only to residual investor demand for liquidity but also to the ongoing effective funds that imposed [gates]. As you've heard me say before, while providing liquidity to investors in accordance with the predefined terms of our funds has adversely affected us in the short term, we believe it will be an important consideration by investors when reallocating new capital over the long term.

We believe that the redemption cycle is largely over for the industry as a whole, although there may be some level of additional redemptions as the cycle continues to taper off. Now let's turn to our fund's investment performance.

Year-to-date through July 31 our Master fund was up 15.9% net; our Europe Master fund was up 9.6% net; our Asia Master fund up 23.3% net; and our global and special investments Master fund was up 5% net. On a relative basis, we continued to outperform major markets worldwide. These results were driven primarily by long short equities where we were profitable in every geographic region; convertible arbitrage, where market movements and new issuances have enabled us to capture profits and readjust our portfolio; and credit, particularly US and European distressed and US structured credit -- thus continuing to illustrate the diversification in our multi-strategy model.

Additionally we continue to concentrate on commercial real estate where we think market conditions will create attractive credit-related opportunities.

During the second quarter, we redeployed additional cash from the Master fund bringing our balance down from approximately 35% as of March 31 to 16% as of June 30. We remain very active in pursuing investment ideas in all of our core -- and all of our core strategies continue to generate strong performance.

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

Thanks, Dan. Today I will review our 2009 second-quarter results and also give you some perspective on how we are thinking about expenses for the second half of this year. For the 2009 second quarter, we reported a GAAP net loss of $88 million or $1.15 per basic and diluted Class A share. For your reference, a discussion of our GAAP results is contained in our press release.

Before getting into the details behind economic income, I want to briefly review the bonus accrual we established this quarter. Bonuses are aligned with the annual economic results of the firm and, therefore, are variable and discretionary.

However, bonuses are also reflective of the compensation needed to retain our employees. For it's central to our ability to deliver value to our fund investment and in turn our shareholders. Although our year-to-date performance has been strong, at this point in the year, we are not able to determine the amount of incentive income we will earn for 2009. As a result, we believe it is prudent to begin accruing for cash bonuses based on our current estimate of the amount we expect to pay our employees at year-end.

Although we continue to follow the same methodology that we have always employed in determining bonuses -- which is to pay them based on the economic results of the firm inclusive of incentive income -- the accrual is designed to provide us with selectability we may need to maintain a competitive compensation structure. I will provide more details on the accrual later on.

Now let's turn to economic income and distributable earnings starting with revenue.

Management fees totaled $86 million of which $85 million was attributable to the front segment and $1 million to other operations. Management fees were 8% lower than the first quarter of this year due to lower assets under management.

Our assets under management declined by $682 million from March 31 to June 30 to $21.9 billion, due to net outflows of $2.1 billion largely offset by the performance-related appreciation of approximately $1.5 billion. The net outflows include redemption requests for the 2009 first quarter which were paid on April 1.

Our average asset -- our average management fee remained at approximately 1.7% after taking into account the impact of changes to assets under management as of July 1. This is a blended rate that includes the effect of our non-feepaying assets.

Now let me turn to expenses. Operating expenses are comprised of compensation and benefits and non-compensation costs. Our second-quarter 2009 comp and benefits totaled $48 million with $43 million attributable to the fund segment and $5 million to other operations.

Of the total, salaries and benefits are $18 million with $14 million attributable to the fund segment and $4 million to other operations. Total salaries and benefits were 6% lower than the 2009 first quarter. Essentially all of this decrease was due to headcount reductions made in the fund segment in the first half of this year, partially offset by an increase in the compensation costs for other operations with was primarily related to our major real estate business.

Salaries and benefits expense totaled 21% of the management fees in the second quarter. Assuming assets remain flat, relative to the current level, we expect salaries and benefits to be approximately 20 to 22% of management fees in the second half of this year.

Second-quarter comps and benefits also included approximately $30 million of bonus expense. Of this amount $25 million related to the bonus accrual we established this quarter with approximately $24 million attributable to the fund segment and $1 million to other operations. This accrual is based on our current expectations at this point in time of the [current] economic results for the year.

As I mentioned earlier, we are not changing our methodology in determining bonuses but simply creating flexibility, since we don't know the amount of incentive income until year-end. As we have always done we will determine the magnitude of bonuses at year-end, based on the total economics of the firm and taking into account many factors, including the competitive environment.

The remaining $5 million of bonus expense is attributable to the fund segment and relates to accruals for guarantees, which will be paid at year-end and certain one-time nonrecurring bonus payments.

Now turning to non-comp expenses. Second quarter 2009, non-comp expenses totaled $23 million with $22 million attributable to the fund segment and $1 million to other operations. Total non-comp expenses declined 10% from the 2009 first quarter, driven by lower expenses in the fund segment.

The largest components of the quarter-over-quarter decreased were our reduction and professional service fees and business development expenses as well as lower interest expense in our variable rate borrowings due to decline in the LIBOR. The decrease in our non-comp costs reflect expense reductions in line with the reduced assets under management, as well as the effect of lower headcount. We will continue to manage these expenses in relation to the economics of our business.

For the 2009 second quarter, non-comp expenses totaled 26% of management fees. Assuming assets under management remain flat relative to the current level, we expect this ratio to be approximately 30 to 32% during the second half of this year.

Our goal, as always, is to manage our business to provide the maximum value to our fund investors and our shareholders. However as I have said on prior calls, we always evaluate our business in terms of providing resources for available opportunities in relation to the current and expected economic results of the business.

Our second-quarter 2009 effective tax rate was 20%. The lower quarterly tax rate was principally related to the reduction in taxable income, due to the bonus accrual and the deduction for vesting and the resulting flow of these economic through our legal entity structure. Taxable income is comprised of management fees, less operating expenses adjusted for the deduction of vesting RSUs, the amount of which is dependent on our stock price on the vesting day.

We estimate our full-year tax rate to be 30 to 32%. However, this estimate can change materially, based on the changes to the economics of our business, including the amount of incentive income we earn, the flow of revenue and expenses throughout structure and the effect that changes in our stock price may have on the induction for vesting RSUs.

The second-quarter 2009 distributable earnings were $13 million or $0.03 per adjusted Class A share. As you saw in our press release this morning, our dividends for the quarter will be $0.02 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 were the quarterly principal repayment of our term loan and additional investments and joint ventures.

Before closing, I want to briefly update you on a balance sheet item. In the 2009 second quarter we opportunistically repurchased $5 million of face value of our $715 million term loan for $3 million. The funds for this repurchase came out of the cash reserve in the third quarter of last year. We will take advantage of these type opportunities where we believe they make sense economically.

In closing, I want to emphasize we will always focus on managing our business to benefit our fund investors and, in turn, our Class A shareholders. As a reminder our partners have a significant amount of their personal assets invested in our fund and on the majority of the equity in the Company which closely aligns them with our fund investors and Class A shareholders. We take a long-term view to building our business and we are very mindful of the value that our employees add to our overall franchise.

We believe that investments we make today will allow us not only to capitalize on the investment opportunities we see in the current environment, but also to grow our business in the future.

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

(Operator instructions). Roger Freeman with Barclays Capital.

Good morning. I guess just, first, to get some of the comp questions out of the way -- so, as we think about your stepped up accrual here certainly makes sense in the context of prospect for incentive fees coming back. I guess I was just kind of looking back at your total comp revenues since, really even before the IPOs, and it kind of started out at 19-ish percent in total and then it was 24% last year.

I remember one of the concerns was that your comp ratio was lower than your peers because the partners are being paid out the dividend. So I guess I want to understand as you look at that ratio is that -- are we starting to see that creep up because either partners are getting paid through comp now, because the dividend is so low because the earnings income as well? Or are people getting promoted here and started to get comp through the P&L or a new hire is coming on? Could you flesh that out a little bit?

Sure. First of all no partners get paid anything out of comp. We are not compensated at all. So that is not in there at all.

Secondly, I think that the ratio increase is obviously a function of reduced assets and reduced revenue. And as you see the management, as you see assets grow through performance and through inflows, you see that ratio normalize. And I think that's basically the difference.

So I think your focus is not necessarily on promotions and infrastructure and of course not the partners because we receive no comps, it is a function of [AOM].

And to follow up around that, I mean you kind of mention the competitive environment and clearly that has improved both on the buy and sell side. But you are in a better spot than most from a return standpoint.

So I guess I'm wondering, what is that competitive dynamics that you need to worry about because most of your competitors are not even close to high water marks?

Our competitive posture, we feel, is very good. As you know, historically, Och-Ziff prides itself on being a very attractive place for people to want to be. We think what has occurred in the past year has increased that. And we have been taking advantage of that.

You have to understand the unusual set of circumstances. As we said, we generated the best first seven months' return in our history -- which is obviously what our LPs want us to do, what all of our stakeholders want us to do. Given the results of last year, there is some uncertainty as to incentive allocation.

And that is the reason to create this flexibility which, as Joel said, we may need through the accrual.

Yes. Totally understood. Just trying to get behind some of the additional logic.

And then just shifting to fees. So can you talk, Dan, about any discussions that have been -- you've had or are having around fee cuts for lockup commitments because there was another Bloomberg article out on this last night. You were mentioned in that.

Are we -- I think you said last quarter you were essentially open to that sort of discussion if you can get the money locked up. How widespread are these discussions?

They are not very widespread. And I think the Bloomberg article did a good job of pointing out what is occurring. It's not the C cuts, it's really institutions approaching the managers with which they want to develop deeper, broader relationships and on asking the question.

If we commit for longer periods of time, if we commit significant amounts of size, is there an opportunity to further our line interest. So we are receptive to those types of discussions. We feel fortunate that as the article pointed out, industrywide, investors get it. It is about manager selection.

And our sense concurs with the Bloomberg article. There's been very little very little discussion of reduction in fees by those managers who perform well.

That's great. And then just lastly, Dan, can you talk about -- and sort of dovetail into that discussion -- your discussions with clients, and how you are allocating your time between sort of the investment process and prospecting? I'm assuming that you have been spending a lot more time on the prospecting front because you've got an opportunity here to really try to grab market share, given your better performance?

Well, I haven't really been spending more of my time. Our belief is that the best thing I can do for prospecting is to generate returns, hire and train the best people, and have the strongest most robust infrastructure operations. Give people reasons to want to have capital with us.

So as a firm, we have ramped up our efforts. We have hired more senior people on the Investor Relations area. And we've hired more geographically, as well.

So the firm is committing more time but my time continues to remain on generating returns for the fund LPs, building the business internally. Our best marketing is performance stability risk management and running the best business.

Thanks. I will jump back in the queue.

Cynthia Mayer with Bank of America Merrill Lynch.

Good morning. I guess, just circling back to the comp a little bit, in terms of the bonus accrual, can you give us an idea of the sensitivities for that? For instance, the Master fund hit your goal of 1% per month performance for the next three months.

Should we assume that the $25 million is a good run rate? Or what if the master fund were up another 8% in 3Q like in 2Q?

As I said, this is no change in methodology. We determine bonuses at year end, based on the total economics of the firm. Obviously what we will do is each quarter we will assess where we are and what we determine the economics to be and we will adjust the accrual accordingly. You cannot take that $25 million and multiply it to three quarters and say that is going to be our bonus pool. Because as I said, we determine bonus -- the bonus amounts at year end, based on total economics.

So don't project it, but obviously what we did was create some flexibility in a year where we are uncertain in terms of how much incentive fee we are going to earn.

Dan, you mentioned one key that encloses quality and I am just wondering if you can elaborate a bit on what you meant by that? Are you thinking about stickiness or some sort of strategic aspect to who invests with you?

I'm sorry, repeat the beginning of what you said. I didn't understand -- .

You mentioned that you think the redemption cycle is coming to an end or is over, and that one key going forward in terms of the net flows will be quality. And I wasn't exactly sure what you meant by that. I wasn't sure whether you were referring to seeking investors money which is a little more sticky; whether you were referring to fund of funds or thinking more of investors that offer some sort of strategic value.

I just wasn't sure what you meant by quality.

Very fair question. To us, the most important factor about the future capital flows is not exactly which month they start, but the aggregate size, the quality of that investor base, and the market share that we are able to attract.

Over the past two years, investors -- as Warren Buffet said two years ago when the tide goes out, we'll see who is wearing a bathing suit. And as usual he put it best. And I think the hedge fund industry has participated in that scenario.

So investors in the hedge fund space now have two years of very good data about what managers really do and how they will sustain difficult periods. We think that is allowing the best investors in the world to make even deeper, broader and more committed decisions to the hedge fund space. We believe that they are more focused than ever on management selection. It is part of the reason why you are seeing discussions as this Bloomberg article mentioned about longer and more sizable commitments.

And could you maybe give us a sense of what percentage a day you end now as fund of funds and what percentage of the outflows in July were from fund to funds?

The current percentage of the fund of funds is about 24% of the firm. And the majority of the outflows were related to fund of funds.

Great. Thanks a lot.

Marc Irizarry with Goldman Sachs.

Just wanted to touch on the accrual for comp, again. Obviously I guess you've got some sort of estimate in terms of what you think incentive performance is going to look like. Could you give us a sense of where you are versus the high water marks? And then on a firmwide basis we could get to one number, but are you at high water marks already? I.e., or above high water marks for some of the investors, meaning that you are already in incentive earning mode in certain places?

The calculation as you've noted is the complex calculation, investor by investor. You can tell from the numbers which you've already figured out accurately that in some cases we are above those high water marks and earning some incentive. And hopefully that will continue for the rest of the year. But I think the way you are thinking about it is right.

And the one thing I would add at the beginning of your question you alluded to the fact that we have some sense of where incentive is going to be. I do want to remind everyone there are five months left in the year.

We do not know the performance obviously we are driven, we are focused, feel good about how we are doing. But we don't have -- we do not know the points for the next five months.

Therefore we don't have insight into exactly where the incentive is going to come out. And that was the sole reason to create the flexibility.

Right and just to add one other thing in relation to performance, our focus has always been on creating risk-adjusted positive returns for our fund investors. That is the main focus. That will lead to the incentive income anyway, but our real focus is returns for our fund investment.

And then just following along on the comp question. Joel, what is the total number of employees at the end of the period? And how has that changed during that period? Have you seen any attrition and was that maybe behind the need to accrue comp here?

Then also were there any -- is there any guaranteed comp in the P&L this quarter?

The number of employees is 358 which is not a material change from the first quarter. As you saw, we have a guaranteed bonus accrual of around $4.4 million which is not unusual from what we generally have.

So I think it is pretty status quo at the moment. And Mark, we have gotten -- not only have we not seen any attrition, but it is the opposite. The level of incoming desire to be here is higher than ever. And we are selectively taking advantage of that.

And then, Dan, can you talk a little bit about investment performance and the competitive landscape? You've mentioned historically that the lack of presence by [prop desks] is an ability to maybe generate some returns that might not have been there over the previous few years.

Are you still seeing that currently and what are sort of your expectations there?

Our year-to-date performance, we think, demonstrates the benefits of our multi-strategy approach. The current environment does present unique opportunities. The competitive environment has become fragmented, but what's very important is that our returns -- throughout the year, throughout the financial crisis, throughout our history -- are not dependent on any one sector, any one geography and most importantly on directional moves in any area.

We believe that environment will continue for the next several years. Clearly, if markets continue to stabilize, it looks as if some of the level of competition will increase from the distressed levels of earlier this year. However that will not impact our ability to continue to generate very strong returns.

And just in terms of flow trends, Dan. It sounds like you are going deeper with existing investors, but maybe it is going to take a little bit of time for the replacement cycles to run its course. Is that a fair statement based on the discussions with clients that you're having right now?

I think it is. Look, the key is there are classes of new investors coming into the hedge fund space. As examples, there are pension funds who had allocations approved prior to the financial crisis and put them on hold. We think many of them will come -- will ultimately invest. Sovereign wealth entities remains an area of potential investment. There are large pools of investor capital internationally that are likely to come into the space.

The good news about these, they are substantial. They are stable. And we think they understand the point of manager selection. And they have seen what's happened the past two years.

As you pointed out, newer investors are likely to be slower in terms of their process than our old investor adding. But the key is do you think that those large flows are ultimately going to come in? And do you think that Och-Ziff will capture a large share? If you do then we think that works very well for us and the exact month it starts is not really what is relevant.

Great. Thanks.

Robert Lee with KBW.

Good morning, everyone. Quick question, this is fee-related. What kind of conversations, if any, are you having with existing or prospective clients, investors as it relates to the sunset provisions you have? I mean, obviously, you haven't had to really test them yet at least this year, but has that started to become an issue at all or any pushback on that?

Well, we don't comment on individual discussions about anything with individual investors but suffice to say that the number one thing we are doing about that issue is generating performance. That was our goal at the beginning of the year. We so far, we are executing well and that is the focus. We think as long as we continue to do that, it will be a non-issue.

And maybe along those lines, you talked about having a lot of discussion with clients, thinking about whether it's longer term lockups, deeper relationships, are you -- do a lot -- are you also seeing a lot of your conversation centered around different fund structures and whether to manage the camp versus kind of a more comingle product and does that create any kind of challenges for you given your -- how you guys invest?

We are not having managed discussions about managed accounts. It is not a significant topic for us.

We think a reason for that is a combination of our history of operational stability. We think the fact that we didn't freeze or suspend or alter the terms of our liquidity in any way -- that was a big deal. That was a big deal to current investors. It was a big deal to anyone in the industry. It was a big deal to investors going forward because it spoke to how we manage our business in times of uncertainty and how we treat our investors in times of uncertainty.

So we think that is a big reason why we have had so few discussions about managed accounts.

And let me add to that, that we also are very transparent. We have a lot of information on investors and our infrastructure, because we are a public entity, is very much independently reviewed and documented. So it is just a big positive for us.

Maybe just one last question. This goes back to the complexion of your conversations.

Are you having -- if I look at the -- where it seems like a lot of the outflows have been concentrated, I think, maybe the European, the Asian funds, is there a geographic concentration to the flows? And that's mainly outside the US? The assets are driven more by fund of hedge funds as opposed to direct investments?

And do you see fund to hedge funds really given those 24% of assets do you see them really coming back much? Or are those assets even really want to consider down the road?

We want to be clear. We don't make a generic qualification about any class of investors. So to imply that the fund of funds, generically, are qualified in any one way -- many of our best investors, our fund to fund investors, they understand what we do. They do substantial due diligence. They represent their clients extremely well. We consider them to be high-quality investors and we continue to consider them to be high-quality investors.

That is how we measure the quality of the investor by the type of due diligence they do and by how they represent their underlying capital.

Thanks for taking my questions.

Dan Fannon with Jefferies.

Good morning. You gave the breakdown for your cash balances. Could you talk about the rest of the portfolio and where you see the most opportunity from an investment perspective today?

Yes, let me get the breakdown and then Dan can go through the opportunity. Long short equity special situation is up 28%. Convertible arbitrage is about 19%. Private investments about 13%. Structured at credit, 10%; other credit, 10%; merger up 3%, and of course cash at 16%.

In terms of future opportunity which we see in a lot of different areas, generic, I think it is fair to say that many markets have had significant moves from the bottom. We have had a belief and continue to have a belief going forward that there will be substantial differentiation within industries, within sectors between those who perform and those who don't perform.

We have got over 150 investment professionals around the globe, totally focused on understanding exactly how every company is doing. We think our multi-strategy model is giving us a big advantage. Having analysts in Asia, in the US, in Europe. Having analysts in credit, in equities who work together all day every day, we think, has helped us a lot with our risk management, help us a lot in terms of creating opportunities.

But we think the ability to block and tackle, generate pennies and nickels and dimes in all places around the globe and all investment is still there.

Are you guys actively hiring personnel today? Or is it something where you are filling in strategic positions as they come up?

No, we are actively hiring. There's a lot of talent on the street that's looking for new, more stable opportunities with growth and with upside potential. We think we are well positioned with that. And we are actively looking for very good people.

Okay. Thank you.

Ken Worthington with JPMorgan.

Good morning. This is Tim Shea filling in for Ken.

The first question that we've got is going back to the question on the high water marks. If performance were to continue at the pace that it has been at for the past five months for, say, the next five months by year end, how much more could we expect in terms of incremental performance base?

We don't predict performance. We don't know where that is going to end up. The thing that we are focused on, obviously, is producing the best risk adjusted return for our fund invested. We will evaluate the economics of the firm at year-end and that is when we create our bonus pool, etc.

Then on current investment opportunities, I think that earlier you had mentioned that commercial real estate may be one area specifically in credit. At what point would you start considering launching new products to take advantage of some of the opportunities that you see?

We are in the process of moving forward with our private investment platforms. So our private investment platforms with a primary focus on real estate, both in the US and Asia, energy and emerging markets, all continue to move forward. We -- throughout the financial crisis we have continued to strengthen those teams and strengthen those capabilities.

Exactly when we begin separate funds we'll determine, based on a combination of market conditions and where we see opportunities.

That's it for us. Thank you.

Roger Freeman with Barclays Capital.

On your performance, just looking at July, the Master fund, I guess up 3.2%. Less than the market, but I guess the strong public performance for you? I know May was a little bit higher, but when you break that down in terms of risk level you are taking, any changes there? If you were to break out what alpha versus beta in that number, because that 3% a high alpha number for the month. How would you think about that?

In terms of risk levels, we haven't increased our risk levels. As you saw, our cash position went from about 35% to about 16%, but that is still a totally unlevered position. Joel gave you the breakdown extremely diversified.

We think we are continuing to generate substantial amounts of alpha. Obviously I can't share these daily P&L numbers, but even in the month of July, the market was down something like 4 or 5% early in the month. At that point we were generating positive performance.

And whether it's January, February this year, you know the his -- you remember the slide from our IPO chart about our performance during down months, which we think is one of the things that really differentiates us. That continues. And we continue to believe it's alpha generation.

What about Asia? Because you were well in excess of indices in the region there in July. Any color on a dramatic outperformance there?

We do have one position in Asia, which was a recapitalization that we were involved with something. It is something we have been working on for some period of time with one of the companies we are involved in.

But still once again, things continue to be very diversified. I can tell you in the Master fund in July, there was no position that accounts for the 50 basis points of performance. Quite frankly nothing was even at that level.

And just on Asia, can you talk about the early days with this real estate team you brought on? You have quite an investment there from a comp perspective and how much money has been put to work. Is that in these numbers yet or is that in the special -- global special area?

We have not invested capital yet. It is one of the platforms we feel very good about. We think that the people we brought in are amongst the best in the world at what they do. A combination with Och-Ziff is going to make all of that even stronger.

We think that Asia, as a region, presents substantial opportunity and real estate is a very, very large opportunity where significant expertise is required. So we are very optimistic about that platform going forward but we have not committed any capital yet.

You gave a breakdown on how the UN is shifting its asset class, so that 30 -- that cash position went from 35 down to 16. It looks like most of that went into long short equities and some additional allocation of credit. Is that a fair way to think about it?

Yes. That is fair.

So obviously a lot more investing activity over the course of the quarter and you look at the noncomp expenses came down sequentially, presumably because at least for a good chunk of the quarter, there was less interesting activities or less transactional related expenses. I mean, did that allocation shift happen late in the quarter and so we look for some of those expenses to pick up as we go into the third quarter here?

No. The noncomp expense reduction is due to a number of different factors, one of which was a strong focus by us on my comp expenses earlier in the year. It is not a result of when the investments were made during the quarter.

So there was a pretty broad-based move back into the long short equities during -- over the course of the quarter?

Correct.

And lastly just on the -- in terms of your discussion with clients about reallocating, I know you don't want to get caught up in the timing, but just in those discussions does your gut say it's a next year event before you see meaningful inflows? Or could it still be this year? I know it's tough to say.

I really don't want to predict the timing. Number one, I shouldn't predict the timing. Number two, I just don't think it is something one can do.

I mean I haven't totally -- Roger, if some fund manager meets with a large potential investor, some of them have Board approval. Some of them are looking for Board approval. Some of them are doing preliminary work. Some of them had allocations approved prior to the cycle, put them on hold.

The key is, on the one hand the month-to-month timing is more difficult because it's not the same investors who have a process which where we know exactly how it works. On the other hand, net net we feel very good about it because it is large pools of potential capital, and investors who [assess] particularly after the last few years really understand what they're getting into.

Thanks a lot.

Craig Siegenthaler with Credit Suisse.

Looks like most of my questions were asked, but maybe I can just ask this question a different way. It is the [P&L] question. I am still unsure at how we should look at comp in the third and the fourth quarter of this year, given what we just saw the pickup in the second quarter. I know you said salaries were $18 million. Is there reason to believe that we should see a bonus accrual like we just saw in the second quarter or is that really dependent and correlated to fund performance in the third quarter itself?

Right. It is totally correlated to how the business performs and as we said, it's a decision. That bonus number for the year is decided at year end, based on the economics of the firm. We readjust each quarter, based on where we think it is, but I think you have it right.

It is based on performance and the environment. And we will take a look at it each quarter and adjust.

Here's another question. Let's say the [occupants] have a great second-half performance here, but they don't -- for the most part they don't clip their high water mark from last year. I know investors have different entry points, but that would mean that performance fees are still like this year, relative to your potential.

Would -- could Och-Ziff still pay out a high level of accrual-based bonuses, even if high-level performance (inaudible)?

As I said we decide bonuses at year end. So we will see where the economics of the firm are. We will decide bonuses at year end. With in in mind, trying to be competitive and retaining our employees. So we don't predict performance and we will do our bonus pool and create it at year end.

And as an arithmetic matter, not to predict anything, but if you look at what our return was in the Master fund last year and where we are this year, you can run the arithmetic but if you go with your assumption of very strong investment performance in the second half it's likely things play out well.

Thanks for taking my questions.

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

Thanks, Ann. During the past quarter, we benefited from an increasing stream of investment ideas and transaction flows across all of our portfolios. As we look towards the second half of the year and beyond, I want to reiterate a few points that we think are important to understanding our firm's growth potential.

First, we believe that our multi-strategy model is well positioned to generate strong risk-adjusted returns in an environment which is unique because the recent dislocation has affected so many asset classes around the world. We have a strong history of generating profits for our fund investors because we are able to capitalize on opportunities in any market globally, rather than being dependent on large directional moves in the markets broadly or in any one particular sector.

Second, we continue to see a significant differentiation occurring among alternative asset managers as investors understand more than ever the importance of manager selection and this plays to our strengths.

Third, we remain confident that as investors began to redeploy capital to alternative asset managers, we will be a leading beneficiary of those flows. We are committed to maintaining the focus and intensity with which we continue to generate strong absolute returns for our fund investors, manage our business and invest for our future growth.

Joel and I look forward to updating you on our progress during the second half of this year. 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 any 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.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the presentation and you may now disconnect. Have a great day.