Och-Ziff Capital Management Group LLC (NYSE:OZM)
Och-Ziff, a publicly traded hedge fund, was founded in 1994 by Daniel S. Och. It has over $30 billion in assets under management and more than 450 employees across offices in New York City, London, Hong Kong, Mumbai, and Beijing. It made the leap into the public sphere in the back half of the last decade. It is generally considered a well run company.
Although one has to take into consideration that Och-Ziff came public during the 2007 to 2009 recession and related bear market, the shares haven’t been particularly great performers. In fact, they are down more than 50% over the last five years or so. This hedge fund would have been a pretty lousy investment option even though it’s a respected outfit. Can Blackstone avoid these types of companies? It’s a big risk.
Political Risk
Then there’s the issue of tax changes. Right now, the hedge fund industry enjoys the so-called “two and 20” fee structure, in which asset managers are paid 2% of assets and 20% of profits. The 20% of profits is particularly beneficial since that income generally receives favorable capital gains tax rates. This loophole, called carried interest, is in the news right now because politicians are looking to have it closed.
In fact, Carlyle Group LP (NASDAQ:CG) co-founder David Rubenstein noted during a quarterly conference call a couple of months ago that he believed the elimination of the carried interest tax “loophole” will be an issue in a second Obama term. The president basically told the world that Rubenstein was correct in an interview that aired before the Super Bowl. If that’s not a shot across the bow, what is?
If the carried interest loophole is closed, it could have notable implications for the industry. Indeed, how investment managers get paid will have to reexamined. At the very least, the profits for the asset managers will be significantly curtailed by increased taxes.
Timing is Everything
With the government looking to raise money in any way it can, some hedge funds could be trying to get out of the business before it changes for what they would view as the worse. That makes complete sense and increases the chances that Blackstone will find happy sellers. However, it could also allow Blackstone to get in at a better price than it might have a few years ago.
The drop in Och-Ziff and several other publicly traded alternative asset managers could also be an indication that prices are low enough to offset the political risks and leave plenty of upside potential should the stock market continue higher.
Blackstone has grown to its current size by taking risks that have worked out. It’s now large enough that taking risks and losing isn’t such a big deal. In fact, its own shares haven’t exactly been star performers, either. Investors who have always wanted to get into hedge funds should watch Blackstone and the carried interest debate. Buying this financial giant might be a good way to participate with a skilled investor—ultimately buying the hedge funds instead of investing with them.
The article Is Buying Hedge Fund Managers A Good Call? originally appeared on Fool.com and is written by Reuben Gregg Brewer.
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