Bloomberg:  Och-Ziff, Bain to Resume Performance Fees in 2010

Sept. 1 (Bloomberg) — Och-Ziff Capital Management Group LLC and Bain Capital LLC plan to charge performance fees on hedge funds next year even if they fail to recoup their 2008 investment losses.

Most hedge funds don’t levy the fees, usually 20 percent of profits, until they climb back to their peak value, known as the high-water mark. New York-based Och-Ziff, which oversees $21.5 billion, and Bain’s Brookside Capital LLC of Boston, manager of $10 billion, resume the fees one year after an annual loss, according to investor agreements obtained by Bloomberg News.

Och-Ziff and Brookside risk angering investors, said Ron Geffner, a lawyer at New York-based Sadis & Goldberg LLP whose clients include hedge funds. Managers have sought to appease investors by easing withdrawal restrictions and providing more disclosure on holdings after losing an average of 19 percent last year.

“Investors can vote with their feet as other managers provide more favorable terms,” Geffner said.

Steve Bruce, a spokesman for Och-Ziff, declined to comment. Alex Stanton, a spokesman for Brookside, didn’t return calls seeking a comment.

In response to an analyst’s question on a first-quarter earnings call, Dan Och, Och-Ziff’s founder, said investors hadn’t complained about its terms.

“We have not had discussions or comments with investors in terms of the high-water mark.” he said. “I think they’re focused on what we’re focused on: generating the performance.”

Och-Ziff Funds

Och-Ziff’s OZ Master Fund Ltd., which had $14.4 billion in assets as of June 30, rose about 16 percent this year through July, after falling 16 percent in 2008. That’s about 2 percentage points away from erasing last year’s losses. Its other funds, the $2.96 billion OZ Europe Master Fund Ltd. and the $1.39 billion OZ Asia Master Fund Ltd., have to rise 10 percent and 17 percent, respectively, to recoup 2008’s decline.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising prices and participate substantially in profits from money invested.

Last year’s losses, the worst on record for the $1.4 trillion hedge-fund industry, mean that many firms are forgoing what had been the most lucrative portion of their fees. Investors also pay a management fee, usually 2 percent of assets.

Management Fees

The limitation could extend into 2010, depending on their gains. Firms relying on management fees might not earn enough to cover employee bonuses, forcing some to pay staff out of their own pockets or possibly shut down.

Funds have lost 21 percent on average since the end of October 2007. The industry’s previous biggest loss was 11 percent in 1998, according to data compiled by Chicago-based Hedge Fund Research Inc. Funds took an average of 11 months to return to their high-water marks, the company said.

Perry Capital LLC, the New York-based firm run by Richard Perry, also limits its performance-fee break to one year following an annual loss. Its Perry Partners International fund dropped about 26 percent in 2008. The fund climbed 16 percent this year through Aug. 21.

Perry decided this year to offer investors the choice of switching to a share class that charges a 10 percent performance fee after an annual decline. In exchange, the fund must return 250 percent of its loss before charging its standard 20 percent performance fee again.

Investors who choose the new share class will pay the 10 percent fee retroactively from the start of this year, according to a letter sent to investors last month.

Michael Neus, a spokesman for Perry, didn’t return calls seeking a comment.

Brookside Capital lost 17 percent last year before fees. The fund rose 9 percent this year through July before fees, meaning it would still need to return an additional 10 percent to make investors whole after 2008.

To contact the reporter on this story: Katherine Burton in New York at kburton@bloomberg.net

Apparently track records mean nothing…

Bloomberg:  Cerberus to Raise New Funds After Investors Pull $4.77 Billion

Aug. 31 (Bloomberg) — Cerberus Capital Management LP plans to raise money in the fourth quarter to buy distressed companies and securities after losses on investments such as Chrysler LLC and GMAC LLC led to $4.77 billion in client redemptions.

The withdrawal requests, representing 60 percent of the $7.9 billion in its Cerberus Partners LP and Cerberus Institutional LP funds, came mostly from other managers who need to pay off investors, according to Mark Neporent, the New York- based firm’s chief operating officer and general counsel. Institutions and wealthy individuals are still looking to invest with Cerberus, which oversees $24.3 billion, including a $1 billion fund raised last month, he said.

“These redemptions are not a reflection of a lack of confidence, but a reflection of demands of liquidity” from the funds of funds that had placed clients’ cash with Cerberus, Neporent said in an Aug. 29 interview.

Cerberus, founded in 1992 by former Drexel Burnham Lambert Inc. banker Stephen Feinberg, stayed out of the limelight as it focused on buying troubled companies, debt and real estate. It stumbled with its two highest-profile deals: leading separate groups that invested almost $15 billion combined for controlling stakes in automaker Chrysler and GMAC, the former finance arm of General Motors Co.

The firm wrote off the majority of its Chrysler stake as the Auburn Hills, Michigan-based company headed into a U.S. government-orchestrated bankruptcy. Its stake in GMAC was diluted when the Detroit-based lender was bailed out by the U.S. and converted into a bank holding company. They were rare mistakes for Feinberg, 49, whose firm has generated average annual returns of about 20 percent since its inception, according to Neporent.

‘Embarrassed and Disappointed’

“We are embarrassed and disappointed by our 2008 performance, and we feel a huge obligation to you to turn this around,” Feinberg wrote in a July 3 letter to clients.

Cerberus manages $19.6 billion in distressed funds that generally buy the same assets, including corporate bonds, bank loans and private companies, according to Neporent, 52. It also runs real estate and lending funds.

Neporent said the new funds will target distressed assets. He declined to provide details, including how much money the firm is seeking to raise.

Cerberus Partners and Cerberus International lost more than 20 percent last year and largely stopped making investments in the fourth quarter, Neporent said. The funds, which capped withdrawals in December, are little changed this year while the firm’s other distressed funds have gained 18 percent.

Choice for Investors

The funds had permitted redemptions semiannually with six months’ notice, which is in line with many hedge funds. Its other funds have four-year lock-ups and trade out of their investments over six to eight years, which is similar to buyout firms.

“We’ve never viewed ourselves as a traditional private- equity fund,” Neporent said. The fund that was completed in July has a four-year lock-up.

Cerberus, named after the mythical three-headed dog that guards the gates of hell, asked clients of the funds that suspended redemptions in July whether they wanted to continue their investment with a lower fee. Those who wanted to withdraw would have to wait for assets to be liquidated before getting back all their money, a process that could take as long as four years.

The firm’s partners hold about 15 percent of the funds, or $1.18 billion, and aren’t withdrawing, Neporent said. Investors with more than 70 percent of the remaining assets said they wanted out.

Fee Waiver

Clients of the suspended funds who want Cerberus to continue to manage their money won’t pay performance fees, typically 20 percent of profits, until their losses are recouped, Neporent said. After that, Cerberus will lower the performance fees for a period of time that hasn’t been made final.

Clients who want to withdraw will be shifted into a separate fund that will return cash as assets are sold. Cerberus will take an annual management fee of 0.5 percent of assets, according to an Aug. 27 letter to investors.

These investors may get about 5 percent of their money back soon after Cerberus sets final terms of the agreement, Neporent said.

It could take three or four years for the assets to be sold and all the money returned, depending on market conditions, Neporent said. The firm will be patient and won’t liquidate at fire-sale prices.

“We will sell only when we think it makes sense,” he said.

To contact the reporter on this story: Katherine Burton in New York at kburton@bloomberg.net.

Bloomberg:  China Investment Investing Billions in Hedge Funds

Aug. 29 (Bloomberg) — China Investment Corp., the country’s sovereign wealth fund, is continuing to shift its investments away from cash and is investing billions in hedge funds and private-equity funds, Chairman Lou Jiwei said.

China Investment has invested “many times” the $500 million that CIC was reported to have placed in hedge funds and private-equity firms in June, Lou said today in an interview in Beijing. He said China Investment was also investing in fund-of- funds.

Lou said Beijing-based CIC’s performance this year “has not been bad” following last year’s 2.1 percent decline in its global investments. He didn’t elaborate. China Investment Corp. had $297.5 billion in assets and had 87.4 percent of its global portfolio invested in cash and cash equivalents at the end of last year, the fund reported earlier this month.

In December, Lou said he didn’t “dare to invest in financial institutions” after losing money on investments in Blackstone Group LP and Morgan Stanley. CIC raised its stake in Morgan Stanley in June by buying an additional $1.2 billion of shares.

CIC aims to allocate $6 billion to hedge funds by the end of 2009, company adviser Felix Chee said in June. Chee, who is a special adviser to the chief investment officer of CIC, said he will initially run CIC’s hedge fund and proprietary trading effort.

Buying Shares

The fund has also been buying shares in the property and resources sectors in recent months. It plans to buy shares of Songbird Estates Plc, a London-listed company that controls the owner of more than half the buildings in the city’s Canary Wharf financial district, Songbird Chairman David Pritchard said on a conference call yesterday. Songbird, which is selling shares to institutions to repay 880 million pounds ($1.4 billion) of bank loans, said CIC will buy a significant stake.

CIC is interested in boosting its Canadian presence after buying a stake in Teck Resources Ltd. in July, the country’s Finance Minister Jim Flaherty said in an Aug. 11 interview.

WSJ:  Atticus to Close Two Big Funds

Timothy Barakett, the founder of hedge-fund firm Atticus Capital, is handing $3 billion back to his investors and closing down a flagship fund, along with a smaller vehicle.

Atticus will continue to operate, and will manage the $1.2 billion Atticus European Fund.

Atticus was one of the highest flying hedge-fund firms over the last decade, surging from a $6 million grubstake in 1996 to close to about $20 billion under management in late 2007.

In many ways Atticus was emblematic of a new breed of aggressive hedge funds, publicly pressuring some companies to make changes. Atticus did less hedging than more traditional hedge funds, and scored huge returns as the markets climbed.

But like many of its brethren, Atticus hit hard times in the past year. The flagship Atticus Global fund lost 25%, in 2008 and is down 6% in 2009, well off the pace of other funds. Since its inception, Atticus Global is up 19% annually, after fees, compared with a gain of 3.9% for the Standard & Poor’s 500, Mr. Barakett said in a letter to investors.

In the letter to investors, Mr. Barakett cited personal reasons for his decision. Firm officials said that it was not a reaction to investors pulling their money.

“After 15 years of being singularly focused on building and managing Atticus, I believe it is time to reassess my future,” Mr. Barakett said in his letter.