Sculptor Capital Management Inc (SCU) 2009 Q4 法說會逐字稿

Good morning, everyone and welcome to the Och-Ziff Capital Management Group 2009 fourth quarter and full year earnings conference call. My name is Nykita, and I will be your coordinator for today. At this time all participants are in a listen only mode. [Operator Instructions] I would now like to turn the call over to Tina Madon, Head of Investor Relations. Please proceed.

Great, thanks, Nykita. 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 statement 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 copyrighted, and is 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 things over to Dan.

Thanks, Tina. Good morning, everyone. We appreciate you joining our call today. As we embark on the new year we wanted to take a moment to thank you for your continued interest and support.

I'll recap our 2009 fourth quarter and full year results and spend some time on our strategic priorities for the coming year and the opportunities we see. Joel will then take you through our financial results, and after that we'll take your questions. 2009 turned out to be a very strong year for us. And we are pleased with our ability to deliver such high quality results, both on an absolute and relative basis for our Fund investors. We ended the year having surpassed the high watermarks on our assets under management, with the OZ Master Fund having one of its best years ever and our Asia Master Fund achieving record performance. The consistency of our approach and stability of our franchise were integral to how we navigated the last 12 months, despite challenging markets and industry conditions. We believe that our unwavering commitment to our fund investors, combined with our ability to generate strong returns, further differentiated our firm in the marketplace and improved our competitive positioning.

Additionally I have always stressed that we believe we have the best team of investment professionals and support staff globally of any firm in our industry. As a management team, we are proud of their exceptional performance over the last two years. It has clearly benefited both our fund investors and our Class A shareholders, and we believe it is an integral component to our differentiated position in the marketplace. As always, we are a performance-driven organization. We maintained a disciplined focus on our long-standing investment and risk management processes and on our ability to identify and evaluate opportunities via our multistrategy approach. These attributes were central to the strength of our returns last year. We have always pursued investment strategies that are not based on leverage, and fund returns that do not rely on asset concentration or large directional bets.

Our resiliency and adaptability enabled us to take advantage of numerous market opportunities across our investment strategies, and we benefited from taking a careful, patient approach to entering new sectors of the market. Our dialogue with fund investors was active throughout the year and interest in Och-Ziff remains high because of our consistent track record, the fact that we enhanced our strong alignment with fund investors, and also because of our world-class infrastructure. We believe that institutional investors continue to view us as a manager of choice. As a result, we began to see new capital inflows in the fourth quarter of last year, and that has continued into 2010.

Over the coming year we will continue to focus on two key priorities. First, to create value for current and potential fund investors by generating high-quality, risk-adjusted returns, and by offering a variety of well-thought-out investment opportunities. And second, to take advantage of our strengths as an organization inclusive of our infrastructure and our ability to offer innovative investment platforms in order to attract new capital to our funds. We believe the attributes which differentiate our firm as an industry leader are integral to driving our future growth. Extending our ability to protect on the downside and to provide competitive performance should be the catalyst for increasing assets under management which in turn will drive earnings power.

Now let me turn to the 2009 fourth quarter and full year business results, starting with assets under management. On January 1 of this year our assets under management totaled $23.5 billion, increasing 6% or $1.4 billion from $22.1 billion on January 1, 2008. We had approximately $400 million of net inflows at the beginning of this year, and as you saw in our 8-K last week, assets under management on February 1 were $24 billion. This included a $500 million net increase from January 1, comprised of approximately $250 million of capital net inflows and $250 million of performance-driven asset appreciation.

As I mentioned earlier, there is strong interest in Och-Ziff among institutional investors, and their confidence in taking on more risk has continued to increase. Our view is that investors view alternative asset managers as a valuable asset class as they begin to put new money to work. We believe that the capital inflow cycle for the hedge fund industry has begun, and that our assets under management will grow. As I noted, we began to see this in the fourth quarter of last year and that trend has continued into the first two months of this year. However, it is difficult to predict the pace of investment, and we fully expect that the month-to-month trend in net inflows will vary as they have historically. We are talking to a mix of existing and new investors that is well diversified, both in terms of geography and type.

We have seen specific interest from pension funds as well as capital from international sources. Institutional investors remain extremely focused on manager selection. They place equally high importance on performance track record, infrastructure, transparency, and demonstrated alignment of interests. As always, we seek to refine and develop our business model to offer innovative investment platforms and structures that meet the requirements of, and in turn align ourselves with, our fund investors. To reiterate, we believe that these aspects of our business and approach clearly differentiate us in the marketplace.

Now let's turn to our fund's investment performance. For the full year through December 31, our Master Fund was up 23% net, our Europe Master Fund was up 16% net, our Asia Master Fund was up 34% net, and our Global Special Investments Fund was up 8% net. In January, despite choppy market conditions, we continued to perform well.

For the month ended January 31, our Master Fund was up 1.1% net, our Europe Master Fund was up 2.5% net, our Asia Master Fund was up 0.7% net and our Global Special Investment Fund was up 1.8% net. We continue to be very active in the asset classes that contributed to our returns throughout last year. During the fourth quarter, the following strategies were the major drivers of our performance -- merger arbitrage across all geographies; long short equities, particularly in industry classifications such as financial institutions in the US and Europe; and various industry sectors in Asia; distressed credit in the US and Europe; and structured credit, particularly residential mortgage-backed securities, although we believe the future opportunity will be in commercial real estate credits. We will continue to pursue a patient, disciplined approach and remain intensely focused on generating returns in each of our funds.

While we cannot predict future performance and the opportunities which helped us generate returns last year may change as markets continue to normalize, we believe that our model and investment approach position us well to generate strong performance for our fund investors over the long-term. With that, let me now turn the call over to Joel, who will take you through our financial results.

Thanks, Dan. Today I will review our fourth quarter and full year 2009 results, give you a perspective on how we are thinking about expenses in the 2010 first quarter, and spend some time talking about our business model. For the 2009 fourth quarter, we reported a GAAP net loss of $47 million, or $0.58 per basic and diluted Class A share. For the full year, our GAAP net loss was $297 million or $3.79 per basic and diluted Class A share. For your reference, a discussion of our GAAP results is contained in our press release.

I will now review the components of economic income, beginning with revenue. Full year 2009 management fees totaled $362 million, down 37% from the prior year, as average assets declined in 2009 compared to 2008 due to redemptions we experienced in the first half of 2009. Fourth quarter 2009 management fees were $95 million, of which $94 million were attributable to the Fund segment and $1 million to other operations. Management fees for the fourth quarter increased 9% from the third quarter due to the $1.4 billion increase in assets under management from $20.7 billion on July 1 to $22.1 billion on October 1.

During this period, $1.5 billion in performance-related asset appreciation was partially offset by $100 million in net outflow. Our average management fee remains at approximately 1.7%. This is a blended fee that includes the effect of our non-fee-paying assets. Full year 2009 incentive income totaled $349 million. As Dan mentioned, we successfully surpassed the high water marks on our assets under management by year end. We began to exceed our high water marks for many investors in the Master Fund which represent 67% of our assets under management in the summer of 2009. Due to the generation of consistent, positive performance in all of our funds, the others followed fairly quickly thereafter.

Now let me give you a quick recap of expenses. Operating expenses are comprised of compensation and benefits and non-compensation costs. Full year 2009 comp and benefits were $215 million, a 44% increase over the prior year. Of this amount, salaries and benefits were $74 million, increasing 5% year-over-year. In the 2009 fourth quarter, salaries and benefits were $20 million, 10% higher sequentially, with $16 million of the total attributable to the Fund segment and $4 million to other operations. The sequential quarter increase was due primarily to certain one-time salary adjustments and staff increases during the second half of 2009. For the 2009 full year and fourth quarter, salaries and benefits were 21% of management fees. For the first quarter of 2010, we expect that salaries and benefits will continue to be 20% to 22% of management fees.

As a reminder, management fees cover what we consider to be our fixed expenses, which are salaries and benefits and non-compensation costs. Growth in assets under management leads to growth in management fees, which should more than cover any increase in our fixed expenses, thus illustrating the scalability of our model. We don't manage to any specific expense ratio but rather to the requirements of our business.

Full year 2009 cash flow as expense was $140 million, 78% higher than the prior year, with $135 million attributable to the Fund segment and $5 million attributable to other operations. The total bonus amount included guarantees which have been accrued throughout the year, the discretionary bonus accruals we took in the second and third quarters of last year, and additional amounts added in the fourth quarter of $95 million.

We followed the same methodology in 2009 that we have always employed, which is to determine bonuses based on the full-year economic results of the firm, inclusive of the amount of incentive income which is not crystallized until year end. In prior years, cash bonuses were on average 12% to 15% of total revenue, and in 2009 they were 20%. However, 2009 was not a typical year for us. We generated very strong performance while at the same time having high watermarks to overcome. The increase in the amount of cash bonuses we paid relative to our annual revenue was reflective of our desire to recognize the exceptional performance of our employees and to maintain a competitive compensation structure as well as a stable franchise. Nevertheless, our employees understand the importance of being closely aligned with the firm's results in both its Fund investors and Class A shareholders, and we will continue to focus on maintaining this alignment.

Now let me turn to non-compensation expenses. Full year 2009 non-comp expenses were $94 million, down 28% from the prior year. The largest components of the year-over-year decrease were a reduction in professional service fees as well as lower interest expense on our variable rate borrowings due to the decline in LIBOR. Partially offsetting this decrease was an increase in occupancy expenses. Fourth quarter 2009 non-comp expenses were $23 million with $22 million attributable to the Fund segment, and $1 million to other operations. Non-comp expenses for the quarter were essentially unchanged sequentially. For the 2009 full year and fourth quarter, non-comp expenses were 26% and 24% of management fees respectively. For the first quarter of 2010, we expect that non-comp expenses will be 25% to 28% of management fees. Our 2009 full-year effective tax rate was 12%, and in the fourth quarter it was 7%. These rates reflect the expense resulting from the vesting of RSUs, which increased during the quarter due to the increase in our stock price, and the resulting flow of these economics as well as our incentive income through our legal entity structure.

In the first quarter of 2010, taxable income will be comprised of management fees less operating expenses. Our full year effective tax rate is subject to variables which are not generally solidified until the fourth quarter of a given year, such as the amount of incentive income we earn, the resultant flow of revenue expenses through our legal entity structure, and the effect that changes in our stock price may have as an induction for vesting RSUs. As a result of these factors, our annual tax rate can vary, sometimes substantially, from our quarterly estimates. In general, in the first three quarters, we would expect the tax rate to be higher, in the range of 20% to 30%, than the fourth quarter on an annual rate both of which are subject to the variables I just mentioned.

Distributable earnings for 2009 full year and for the fourth quarter were $355 million or $0.88 per adjusted Class A share and $281 million or $0.69 per adjusted Class A share respectively. As you saw in our press release this morning, our 2009 fourth quarter dividend was $0.58 per Class A share, and our 2009 full year dividend was $0.72.

As in prior quarters, we used cash to fund items related to the operation of our business. The most significant of these items was the repurchase of $100 million face amount of our term loan for $80 million. Approximately $48 million of this amount came from the fourth quarter operating cash, and $32 million came from the cash we reserved in the third quarter of 2008. The current outstanding face amount of the loan is $636 million.

Before closing, let me take a moment to update you on two modifications we made to our business model. As Dan mentioned, we are always looking at ways in which we can tailor our products for the benefit of our fund investors to further increase our alignment with them. We believe that we best accomplish this not only by enhancing the structure of our business based on their feedback and ideas, but also by anticipating based on our knowledge of the market place and their needs. In this context we decided to move proactively to a perpetual high watermark across all our funds, effective as of the first of this year. This change is simply an evolution in our business model in order to maintain a close, ongoing alignment of interests with our fund investors.

Additionally, to further enhance independent review of our infrastructure, we have proactively decided to add a third-party administrator to provide independent, monthly asset verification for our funds and report these results to our fund investors. We have always been responsible for the creation and verification of the books and records of our fund, and this doesn't change our responsibility. This is an additive measure to further strengthen existing independent processes that verify the financial statements of our fund.

As a public entity, many of our key Sarbanes-Oxley controls are related to our funds, as all the revenue to the public entity is earned through the management of those funds. The detailed documentation and independent review of our controls by our internal and external auditors are already a significant benefit to our fund investors and a key differentiator in our business.

We believe that adding asset verification through third-party administration to an already strong and independently reviewed control process simply strengthens our existing infrastructure. We routinely evaluate practices in the marketplace and how these affect the needs of our fund investors. We will continue to make changes that benefit them, such as the ones I just highlighted. We feel that this further enhances our positioning as a manager of choice.

In closing, I want to take a few moments to emphasize the scalability of our business model and its results in potential earning power. As I mentioned earlier, as assets under management grow, management fees grow, which should more than offset any increase in fixed expenses as our business expands.

Although we can't project investment performance, we are starting 2010 with no high water mark which give us the potential to earn full incentive fees this year, assuming we generate positive performance in our funds. As you know, management fees and incentive fees are collected in cash and flow right to the bottom line, and as always been our policy we expect to continue to pay out substantially all of our annual distributable earnings to our Class A shareholders.

Since our firm was founded 16 years ago, we have generated incentive income in all but two years. In each case we recouped and surpassed the high watermarks in the following year. We believe the consistency of our revenue generation, combined with our long-term view to building our business, increases the earning power of our model now and over time. With that, we will be happy to take your questions.

(Operator Instructions) Your first question comes from the line of Roger Freeman with Barclays Capital. Please proceed.

Good morning. Maybe I'll just come to the comment at the end, Joel, to start with. The decision to move to perpetual high watermarks -- is that, do we take that as a sign of, I guess, intense competition to get sort of limited inflows right now? Because that wouldn't have even been an issue for you this past year.

Roger, let me answer that because I think I have more dialogue with the clients. That would be -- that is not the conclusion at all. We are constantly asking clients, primarily generated through the Investor Relations group, is there anything we can be doing better? So that results often in enhancements to our transparency report and other disclosure, other types of communication. Despite receiving extremely high marks, two areas where we were told we could make a slight improvement -- one was a general feeling by institutions that a perpetual high watermark is more comfortable than the one year high watermark. And two, given some things that occurred in the industry that did not relate to us, there's been a general focus in the industry towards some type of third-party administration or other verification.

So we proactively moved in that direction. We thought doing it at a time where we made clear -- once again Och-Ziff had two years in its history where there's been a high watermark; in 2002, it was about 1.5%, and in 2008 it was more significant than that. But in every year of our history we have earned through that in the first year, making the one-year high watermark irrelevant. But it's just a desire by us. We feel we're very strongly positioned. We feel we're doing all the hard things -- returns, how we performed in 2008, not gating or suspending redemptions. And so these are just a couple little things that we do to make it easier on clients.

Okay. Got it. And I guess with respect to flows, a couple questions. One, you talked last quarter and again this quarter about pension funds and international investors, I guess including sovereigns being sort of areas of focus. On the flows that actually have come in the door, where have they been more weighted, through international or pension?

It's really been both. It's been both. And I want to remind you, as much as we have highlighted that we feel very good about the trend, we feel extremely good about Och-Ziff's position and the dialogue that we're having. But we also highlight that month to month numbers are extremely difficult to predict. The good news about pension funds, sovereign wealth entity, and other large investors is that the numbers tend to be larger than historical investors. And the money is likely to be more long-term. On the other hand, the processes are also longer and predicting the month to month is more difficult. But it's been a very good mix, both on the pension fund side and the international side as is the interest.

Okay. And in discussions with potential investors or existing ones in the past just few weeks, have you picked up any incremental hesitation just given the rise in political and sovereign risk?

No, not at all.

Okay. And lastly can you just maybe talk about your thoughts on distribution, the dividend going forward? One of the things we've seen with you and peers over the past couple years is given sort of low level of absolute earnings, the payout ratios have been probably lower than you would have even targeted. Now that we get to a normalized earnings environment, how should we think about what percentage you'd look to pay out given your reinvestment needs?

Roger, as I said earlier, our thoughts on this haven't changed. We expect to pay out substantially all of our distributable earnings to shareholders.

Okay. Thanks.

Our next question comes from the line of William Katz with Buckingham Research. Please proceed.

Thank you and good morning. Just a couple questions, maybe come back to the flows for just a moment. I just wondered if you could talk with maybe a little more granularity on where you see geographic-wise and/or product-wise perhaps the greatest lift? And then I thought in your prepared comments you sort of alluded to, maybe just my interpretation of it, maybe potentially a new product? I may be wrong there. But sort of curious where do you see the best flow prospects?

Sure. In terms of the geographic, it really is a mix. And as I said, given that the investors we're dealing with today tend to be lumpier with longer processes than what we were dealing with several years ago, it would be difficult to predict the exact mix even if you sat in the meetings with us. But it really is -- it's a good mix. There's a lot of interest. I think all investors understand the value of alternative asset managers who have performed and are likely to perform. We think the differentiation is greater than ever, and we are working hard every day to make sure that we stay on the right side of that. But the mix is very good. And I'm sorry. Your second question again, Bill?

Just sort of curious, maybe I just misinterpreted what you said. Are you considering any new products beyond what you already have out there?

Well, look, we're always -- we're always open to client interest in new investment platforms. So there's nothing specific that we're focused on right now. But I think that for the past several years, institutional investors, particularly the chief investment officer level, have highlighted that there's more to Och-Ziff than just the return I get and its risk-adjusted nature from the investment I have. There's a huge amount of information, there's a lot of capability in different asset classes, there's a lot of capability in different geographies. There's a lot of trust in the organization, its systems, its operations and its controls. So we of course are always looking to provide as much value as possible to clients and share that information. And it's possible that that may lead to things over time.

Okay. And just one last one. This would probably be an unfair question. But any sense of maybe an update in terms of legislative risk around carry interest taxation?

I think we know as much as everybody else. Until there's something that's actually passed, we stay on top of the stuff but we're not going to -- there's really nothing more that we can focus on until there's actual law passed.

Okay. Thank you very much.

Our next question comes from the line of Cynthia Mayer with Bank of America. Please proceed.

Hi. Good morning. Thanks. In terms of flows, just curious what's the demand for the Asian and Europe funds versus Master Fund? And is it any concern to you that the Master Fund is now a greater proportion of overall assets than it used to be?

The demand is generally across products and geographies. It's mixed. And the issue with the Master Fund is not a concern. We'll point out that the Master Fund right now is smaller than it was at its peak. Our performance has been positive, so the fact that we didn't gate or suspend when others did has caused the Master Fund to be smaller than its peak. We feel very good about the opportunity set. We feel the team is stronger than ever. We think you're seeing that in the results. I'll also point out that institutions continue to be very sophisticated. And in addition to results, they continue to monitor results during down months and other relevant information.

Okay. And, you know, if you look out a few years and the Master Fund continues to grow well, do you have any idea in your mind about sort of what the ultimate size or capacity constraint could be on it? Obviously it's smaller than it used to be. So you've operated it well at a larger size. But is there any size past which you wouldn't be comfortable?

Well, we've always balanced that issue. I hope we've made clear since the IPO and over the past couple of years that our focus is on generating the best risk-adjusted returns for our fund LPs and aligning our interests with our fund LPs. That's what Och-Ziff is all about and that is not going to change. And part of that is balancing that issue. As you're aware, myself and my partners have a large amount of our personal capital invested in the funds. And we think we balanced that very, very well for 15 years. And we'll continue to do so.

Okay. Just a couple more specific questions, I guess. To the extent you hold back some cash from distributions can you talk a little about your priorities for that? Are you going to, for instance, buy back more of your term loan?

Cynthia, we have no specific plans to do anything with cash flow other than paying out substantially all to our investors.

Okay. And the decision to add a third-party administrator, does that add to costs? I mean, or is that really not significant in any way?

It's not significant. It's immaterial.

Okay. And let's see. I guess that's it for now. I may come back in the queue.

Our next question comes from the line of Dan Fannon with Jefferies & Company. Please proceed.

Good morning. Are you guys having any discussions around the changing of actual fees on either management fees or trying to get capital in to lock it up over a longer term? I think you discussed a little bit of that in last year's potential opportunity. But are any of those discussions happening today?

There have been occasional -- there have been occasional inquiries by institutional investors about longer lockup structures with modifications that go along with it. It's not a significant part of what we're doing, but it's something that we are open to. We view -- when the discussion opens with if we commit for longer and it's a larger amount of capital than it might otherwise be, do you have some flexibility, we are open to that type of discussion.

Okay. Then as you think about your customer base, over the next two years looking out, do you think there's going to be a material shift, you know, maybe away from the fund-of-funds and more towards sovereigns or more international? Is there any kind of general shift that you think is going to occur over a little bit longer time period?

Well, our goal is to do a couple of things. Number one, to generate the performance, the risk management, the infrastructure, the ethics and integrity, the transparency, to do our best to be the manager of choice. Number two, our goal is to keep as diversified an investor base as possible. Number three, we'll always remain students of the market, we're always looking to learn. And our goal is really to be diversified and to have the highest quality investors. I want to reiterate something we said on the last call. I know that it's fashionable to be negative on fund-of-funds. We feel that our fund-of-funds investors are very high-quality institutional investors. They conduct rigorous due diligence. We believe they have their clients' interests in mind. We believe their goal is to provide value to their clients. And therefore, we're comfortable with where we are.

Great. Thank you.

Thank you.

Our next question comes from the line of Marc Irizarry with Goldman Sachs. Please proceed.

Thanks. Dan, can you just give us a little bit of sense of the, or maybe not if you have the figures there of the mix of your LPs by type and by region now?

Yeah, Marc, I'm happy to give that to you. Fund-of-fund is about 23%, pensions about 23%, foundations and endowments about 18%, corporate and institutional 12%, affiliated capitals around 10%, family office individuals around 7%, and private banks around 7%. And in terms of geographic breakdown, North America about 57%, Europe about 27%, and then Asia and other is the difference.

Okay. And then Dan, can you give a little more color on the breakdown in strategies in Master Fund as it stands today?

Well, Marc, let me also do that as well. Long short equity special situations is 30%, converts, convertible arbitrage 19%, structured credit 12%, private investments 11%, other credit 11%, cash 13% and merger arb is 4%.

Okay. And then maybe Dan again, if you can just think about where the Master Fund's positioned today versus what the investment opportunities are as you look ahead. You know, you mentioned maybe commercial real estate credits is one area. But can you just talk a little bit about the regions and the asset classes where you see the most opportunities?

Sure. What we've been saying since the beginning of the year is that at the micro level, meaning the bottoms up, the investment ideas being generated, there's a lot -- there's a lot of opportunity when we look at it from a bottoms up point of view. We see a lot of opportunity in certain of our investment areas. Right now the focus is primarily on the long short equity side, on some of the event-driven opportunities, on the structured credit side. And we see the beginnings of the distress cycle and are starting to take advantage of that.

Geographically what's so interesting is that global economic growth is not synchronized. In hindsight, in the last decade it generally was synchronized and now it's not synchronized. That means that having as many people on the ground as we do, having as long a history as we do, having as many relationships as we do, creates more of a differentiation both in terms of the types of opportunities we see and how this -- how what occurs in different economies ultimately feeds over into other economies. And trying to be ahead of that from a risk management point of view as opposed to behind it. So from a bottoms up point of view, we're extremely excited about the opportunity set.

Against that there are significant risks in global economies. Most of them relate to some of the large imbalances that exist -- imbalances in fiscal policy, imbalances in monetary policy that are not likely to be able to persist. And our view -- our view is that in the 27 years we've been doing this, no one's ever told us the day before they're going to matter. So we have to be conscious of them all the time. And manage the -- this is something that we've done at Och-Ziff for 16 years now. We've never predicted these things, and we don't think we can predict them, but we think we understand them. We think we understand the impacts they'll have if they become relevant. We've been doing that so far this year. And our expectation is that that will continue to be the case for the balance of the year.

Okay. And then I think in the past you've given us the level of cash where you are and what your gross and net exposure is. Any of those details available?

Cash as I mentioned earlier, Marc, was around 13%. And I don't know if we've given you gross long short before. I don't think we've given out that information.

Okay. And then Dan, can you discuss how the ultra high net worth and maybe high net worth demand is? And do you see that as a channel for you that over time can grow? And are you doing anything tactically to expand in that area?

We think it is an opportunity. You know, we do think that ultra high net worth is another pool of capital that should be interested in our type of risk return profile and should be interested in investing with high quality organizations with whom they can be for long periods of time. So we are focused on that area. Joel mentioned that 7% of our capital is from private banks. We're being selective and careful and thoughtful. But we are open. And there is a significant amount of interest.

Okay great, thanks.

Thank you.

Our next question comes from the line of Ken Worthington with JPMorgan. You may proceed.

Hi, good morning. Going back to the perpetual high watermark -- Dan, I think you mentioned it was kind of a slight improvement for investors, but it seems like there's a big risk for shareholders and employees. There have been a large number or a number of high profile larger hedge funds that have had to shut down if they've had a particularly bad year. So I guess the first question is, are you making changes to compensation at all as you go to the perpetual high watermark to better bind your employees to Och-Ziff so that should you have a catastrophic year, the company doesn't cease to exist?

Well, we're not making changes because of that. This was just one of a number of small changes that we made, you know, as part of our goal to enhance our position as a manager of choice. Now, we've been doing things to bind and incentivize people to be part of Och-Ziff for a career, not just a job, since inception. So the concept of shared ownership, of paying everyone off the same P&L, of management communicating frequently during difficult times, of sharing the investment strategy, of sharing the decision making process, that's something that I think we've focused on and excelled at for 15 years.

As part of going public, as I think you know, we further enhance that by giving stock grants to every employee of the firm. And for senior people, significant parts of compensation have been stock ever since the IPO. That's not a reaction to changes that are going on in the marketplace. So we think the concept of making people feel like owners, making them feel like they benefit from the success of the organization, making them here for a career opportunity, not a job opportunity, has been something that's been with us since inception. And it is an important part of what we do and the value of the franchise.

But you keep mentioning it's a slight improvement for investors. You're the biggest owner around. Don't you feel that this changes the risk profile for the owners here?

Well, I think you just made the most important point. I am the largest owner, and the other senior partners collective are the largest owners. And you're right. We made the decision that we thought was in the best interest of the owners. We're in a position where we think there's significant interest in the asset class. We think there's significant differentiation by institutional investors amongst managers. We think the investments are going be larger and chunkier. And as institutions go down their list towards the end of a process and check boxes, we wanted to make sure that there was nothing to stand in the way procedurally of their decisions.

And Ken, let me remind you, as Dan mentioned earlier, we've only had two down years. And in each case right after that we surpassed the high watermark. So I think that's an important point to focus on as well in terms of the point you're bringing up.

Yes. And I get that. But it seems like it's a compelling argument but it's almost an argument that I feel that you guys could have made to potential investors and they would have gotten that as well.

Ken, I think going back to your original point, you know, our whole concept of aligning interests -- you said it. The owners of the business made this decision proactively with a view that balancing the issues it is absolutely in favor of the owners of the business. And that's the concept of aligning our interests with Class A shareholders. And we did make that decision proactively. So I understand your point. And that's one of the reasons why we wanted to make sure to mention it on the call. But we made the decision proactively because of the competitive position we're in.

Okay. Just maybe moving to the sales pipeline, are you seeing one particular or particular classes of investors either by geography or type kind of re-engaging with hedge funds more quickly than others? Is the fund-of-funds coming back quickly, are the fund-of-funds coming back more slowly? Is Middle East investors coming back more quickly or coming back more slowly? Like any differentiation by, I don't know, any of the various ways that you segment your customer base in terms of interest and engagement?

It's not about one coming back more quickly or not. The pension funds the who are entering the space for the first time and these sovereign wealth entities entering the space for the first time have a longer process, just as a matter of institutional structure, than some of the investors that existed several years ago. On the fund-of-funds side, what we're seeing is that fund-of-funds where the underlying investors -- who the underlying investors deem to be value-added, quality organizations, that's where the investors appear to be going. Granted we are only seeing that secondhand but that is our observation. But we think that's consistent with what we are seeing directly. We're seeing differentiation everywhere.

All right. Thank you very much.

The potential sources of capital, as we've highlighted in this call, whether it's international, pension fund, ultra high net worth, fund-of-funds coming back, the potential is very high. You know, what we do every day is work hard on our returns, on our risk management, on our transparency, on our infrastructure, on our people, on our personnel, to give whomever is going to come in a reason to select us as the manager of choice.

Our next question comes from the line of Robert Lee with KBW. Please proceed.

Thank you. Good morning, everyone. Real quickly, Dan, I'm just curious with the hedge fund cycle coming back and I guess your competitors who are all left standing, for the most part I guess demonstrated that they could survive a pretty tough environment. Are you starting to see increased competition for talent? I mean, obviously in the last year you had to reflect it in comp to some degree. But are you starting to see any kind of renewed pressure out there as you head into 2010?

Well, in our view the competition has always been there. And most importantly, even during that short period of time when given the general employment picture on Wall Street, some might have assumed that there wasn't competition for their talent, we always assume that there's competition for our talent. You know, I hope we highlighted during my remarks how important the people of this organization are, how much we value the people of this organization, how much having them work together and using the culture that we've developed benefits our fund investors and our shareholders. So look, at the margin, is there more competition for the talent now than at the depths of what was going on in late 2008? I'm sure that's true throughout the financial services industry. But it's not different than we've dealt with for 15 years, and we haven't changed how we do things.

Okay. And just going to some of the proposed -- the proposals out there changed taxes and not so much carried interest but there's a lot of proposals that relate to taxation of foreign earnings and whatnot. Is there anything aside from carried interest that's being proposed that if adopted as currently recommended by the administration would have a negative impact on your tax rate or anything else?

Look, Robert, as I said earlier, you're absolutely right. There are a lot of proposals out there. Until something becomes law, you know, we're on top of it. But until something becomes law, we're not going to comment on those.

Okay. And lastly just to confirm, I think you mentioned that you're through all the high watermarks on all the funds at this point?

Yes. That's correct.

Okay. Great. Thank you very much.

Thank you.

Our next question is a follow-up from the line of Roger Freeman with Barclays Capital. Please proceed.

Sorry. Yeah. Just a couple follow-ups. One, on the [AOM] breakdown, the other credit, is that mostly high yield and distress? Would that be fair to say?

Yes.

Okay. And Dan, I think you talked last quarter about sort of buying resi loans from banks as they were able to sell some of those down and absorb the writedowns with better operating earnings. Has that sort of passed, or is that still an area of interest? It looks like structured credit came down a bit on your mix.

Look, that is still an area of interest. I think that one surprise of this cycle is that fewer assets across the board, but fewer assets have been sold than might have been expected. On the other hand, there are still hundreds of billions of dollars of mortgages that are either not performing or potentially not performing. We did mention that the commercial real estate cycle is likely to present significant opportunity going forward. It's difficult for us to predict exactly when and how -- you know, I think what we believe in here, we believe in the concept of luck as when preparedness meets opportunity. So we own a subprime mortgage servicer. And that should give us an advantage.

Right.

We have a significant commercial real estate capability and that should give us an advantage. We work very hard on our relationships with the financial institutions and try and work with them to solve their problems in ways that are good for our fund LPs as opposed to just looking to bid on what they have to or need to sell. So we're doing the best that we can. We do think it's likely to present opportunities. But at the end of the day, we can't predict when and if things will be sold.

Is it your sense that there's still a lot of pressure on the part of institutions to sell these assets down? Or given their enhanced capital positions, they're kind of willing to wait out the cash flows now?

You know, it varies institution by institution. And things change over time. And it's a combination of what the shareholders want, what the regulators want, what the board wants, what the opportunities are, where things are marked, where they think things are going. It really is all over the place.

Okay. And then you made an interesting comment, Dan, about the sort of uneven global economic growth going forward. Could we at all expect to see FX or rates entering the [AUM] mix or is that just a macro strategy, you don't really want to play, you do that more through securities selection?

You should not expect to see that enter what we do.

Okay. And just following up on one of the questions about competition for talent, what do you think about the proposed restrictions, the [vocal] rules stuff on prop trading at the larger firms and whether that could shift more capital over to firms like yours? And employees as well?

Well, look. As Joel said, on all these regulatory issues, we don't want to comment or speculate until things are actually finalized. But as you're pointing out, included in this mix there are some proposals that look like they would be negative for us. And there are some proposals that look like they may be positive for us. And we're going to just focus on our business and what we're doing, and just keep working hard.

Okay. Great. And then lastly, can you give us an update on special investments? Has there been much investing activity in the past quarter? How much of that is invested now?

As I mentioned earlier, the private investment's around 11%.

So that's similar to where it was. There has not been much -- it goes back to what I said before. One of the surprising things about this cycle is that people have not been forced to sell assets as quickly as in other cycles in an economic environment like this. That is what is most likely to create the most attractive special investments. We think they will come. We're working on a number of items. But to answer your specific question, there has not been much activity recently.

Okay. Great. Thanks.

Thank you.

Our next question is a follow-up from the line of Cynthia Mayer with Bank of America. Please proceed.

Hi. Thanks. Just a follow-up on a comment you made earlier. You mentioned your advantage in having folks on the ground around the world. Can you give us a sense of your staffing by geography at this point and how you see that evolving? Is there any particular area you want to add to?

Generally we don't disclose by geography. I'll tell you we have 378 employees which is up a little bit from the third quarter. And that has to do with growth in the business.

Okay.

We have an approximate number, Cynthia, we've got about 70 employees in Europe. We've got about 65 employees in Asia.

Okay. And you don't see any particular changes in where you want to staff up?

No.

Thank you.

Thank you.

Our next question is a follow-up from the line of William Katz with Buckingham Research. Please proceed.

Okay, thank you again. Just in light of the shift to a potential high watermark, any contemplation of providing a little bit more granularity on assets in your monthly press releases to help investors better track the high watermark trends?

Can you be more specific? Because I'm not sure exactly what you're asking us to provide.

Just wondering, on a quarterly basis you provide your AUM by the major fund, the Master Fund, US, Asia, et cetera. On a monthly basis you just sort of give a number for the franchise. Just sort of wondering to sort of help try and gauge the high watermark trends if you'd be willing to give assets under management by each fund each month.

That's not something we're planning to do at this time. You know, as we said on the fund investor side, our investor relations group is constantly speaking about what investors are interested in and what gives them more comfort and transparency. You're certainly welcome. We're receptive to make suggestions to Tina Madon. And we'll take everyone's view into account.

Okay. Thank you.

But it's not something we're intending to do at this time.

All right. Thank you.

Thank you.

our next question is a follow-up from the line of Marc Irizarry with Goldman Sachs. Please proceed.

Great. Apologies if I missed this, but Joel, can you give us a headcount at the end of the year? What's your plan for headcount for next year?

As I said before, 378 at the end of the year. And we have no specific plan for headcount; obviously, as the business grows we'll source people as we need them.

Okay. Thanks.

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

Thanks, Nykita. To recap, 2009 was a very strong year for us and one which we believe further differentiated us as a manager of choice. We surpassed the high watermarks on our assets under management, and successfully extended our investment performance track record. We also saw assets under management begin to grow. We're enthusiastic about the opportunities we see in the coming year to generate returns for our fund investors, and we intensely focused on positioning our franchise for continued asset and earnings growth.

Let me take a moment to reiterate a few points that I think are important to evaluating our firm. First and foremost we are a performance-driven organization. This mindset was central to the strength of our returns last year, and will continue to be integral to our approach to investing and risk management. While we cannot predict future performance, we believe our model and investment approach position us well to continue to generate strong performance for our fund investors.

Second, we rely on a multistrategy approach that gives us the ability to be nimble and adaptable in identifying and evaluating investment opportunities. At the same time we are patient, disciplined investors and we create structural advantages in asset classes where we see potential opportunities. These attributes enable us to properly evaluate and consistently take advantage of market opportunities across asset classes, markets, and geographies both now and in the years to come, which increases our competitive positioning.

Third, interest by fund investors in Och-Ziff remains high and we believe that we are viewed as a manager of choice. We think that the capital inflow cycle for the hedge fund industry has begun, that our assets under management will continue to grow, although we cannot predict the pace of that growth. We continue to be confident we will be able to gain market share of new flows given our differentiation.

And fourth, we are intensely focused on being best in class in everything we do, and refining and evolving our business model to maintain our close alignment with our fund investors. This has been a hallmark of our approach since we founded Och-Ziff and it's a competitive strength. With that, Joel 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.

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.