Institutional Investor's Alpha Magazine - May 2008 - (Page 31)

Och-Ziff asked Och if he would be willing to leave Goldman to help invest some of the wealth. Och hesitated brieﬂy — “I thought I’d be at Goldman Sachs my entire career,” he says — but decided he couldn’t turn down the offer. The Ziffs were ready to hand him $100 million to launch his own hedge fund in return for a 10 percent equity stake in the management company. Och’s deal with the Ziffs stipulated that the family would lock up their investment with the hedge fund for ﬁve years, after which time he and his team could seek other sources of capital. Although some of his peers questioned the efﬁcacy of remaining closed to other investors for so long, Och thought it would be an advantage to have a stable pool of capital so that he could focus on building infrastructure and recruiting talent. “My plan, from the outset, was to very slowly and methodically build a large alternatives ﬁrm,” he says. “In 1994 the number of hedge fund managers who really thought about developing a business platform was still quite small, so I think we were unusual.” Och’s ﬁrst investing partner was Goldman colleague Windreich. A bearish man whose gruff honesty and humor made him popular, Windreich had been a salesman in the bank’s derivatives and arbitrage business and had a keen interest in trading. He had known Och for more than a decade — their desks at Goldman were only a few feet apart — before joining the ﬂedgling business. “The most important thing is that we stayed flexible about how we were going to make money,” Windreich says. “We didn’t have a ﬁ xed blueprint or strategy; we just wanted to earn really good risk-adjusted returns.” The ﬁrm initially took space in the Ziffs’ investment ofﬁce at the old Bankers Trust Building on Park Avenue. Och’s experience at Goldman had convinced him that the best way to build a cohesive investment team over time would be to base compensation on the ﬁrm’s total profits and losses as a means of preventing employees from hoarding ideas and developing their own trading silos. By tying everyone into the overall success of the ﬁrm, he also anticipated that he and his team could discuss the risk-return merits of various opportunities and have more freedom to shift money between them, since it would be less of a threat to individual portfolio managers. Och also wanted to amass talent and emulated Goldman in recruiting new staff. Instead of luring senior traders and executives away from investment banks, he and Windreich hired good young analysts and inculcated them in Och-Ziff’s culture of shared incentives and ideas. They focused on ﬁnding traders and portfolio managers who could bring new perspectives to the business and who were willing to carry its culture into new geographies. “Culture is everything,” says Lehman CEO Fuld, who has had many conversations with Och on the subject. “You can’t run these organizations without a sense of culture — without a strong bond. Wipe out the silo mentality. Wipe out the P&L turf mentality. I know it sounds hokey, but you need to have everyone pulling on the same oar.” Photo by Ian Phillips-McLaren for Alpha Two of Och’s early recruits, Cohen and Varga, are now senior partners: Cohen, 36, who worked at OchZiff ’s New York headquarters for two years before moving to the U.K. in 1999, now manages a team of 65 people in the ﬁrm’s London ofﬁces as head of European investments. Varga, 34, who trained in New York and then went to London to work with Cohen for a couple of years, opened Och-Ziff ’s Hong Kong ofﬁce in 2001 and now oversees Asian investments and a team of 60. The intellectual autonomy that Och has granted his young senior partners has permitted the firm to grow more quickly — but it has also introduced the possibility that they may strike deals, like the Marubeni loan ﬁasco, that don’t work. Varga, whose team made the ill-fated loan, credits Och with giving him the freedom to act. “We do have an entrepreneurial spirit here, which is why so many senior people have been with this ﬁrm for so long,” Varga says. “But Dan also allows people coming up through the ranks to have opportunities to prove themselves, which is impressive.” Och has been careful to avoid the great pitfall of successful hedge fund managers — the egocentric belief As head of European investments, Michael Cohen oversees a team of 65 people in Och-Ziff’s Mayfair ofﬁce in London. MAY 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 31

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - May 2008

Institutional Investor's Alpha Magazine - May 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Send in the Clones The Good Guys: Outside the Box Cover Story: Welcome to Oz Interview: The Tipping Point Regulation: When Sentinels Go Astray Strategies: Taking Credit Research Center: The Hedge Fund 100 Book Excerpt: Shoot the Messenger Alpha Bytes: VaR Enough? Unhedged: Commentary: Not Your Father's Activist

Institutional Investor's Alpha Magazine - May 2008

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