Hedge Funds Continue Public Path

Increasingly skeptical investors and lawmakers are apparently not enough to deter yet another hedge fund giant from going public.

Och-Ziff Capital Management, a $26.8 billion hedge fund founded by a former Goldman Sachs trader and members of the Ziff publishing family, filed for a $2 billion initial public offering yesterday. It joins a burgeoning field of alternative asset management companies that are seeking to raise capital in the public markets, acquire stock to use in deals and cash out their principal.

Since the debut of the Fortress Investment Group five months ago, selling shares to the public has become the latest achievement in an industry — alternative asset management — that not too long ago would have scoffed at the prospect of public ownership. Indeed, private equity firms profit by taking companies off the market and improving their operations. On its first day of trading, Fortress stock gained more than 60 percent.

But that rosy outlook began to fade last month when Congress intruded on the marketing of the offering for the Blackstone Group, the giant buyout firm. Two groups of legislators introduced bills to increase tax rates on private equity firms and some hedge fund managers. One would significantly raise taxes on partnerships related to investment management that go public; the other would increase taxes on “carried interest,” a term for the hefty performance fees that make up the bulk of buyout firms’ compensation.

Blackstone went public at $31 on June 22, raising $4.75 billion. Its shares gained 13 percent the first day and then began a slump that put them below the offering price. They were unchanged yesterday at $29.27.

Last week, GLG Partners, one of Europe’s biggest hedge funds, said it would pursue a listing in the United States through a merger with a holding company here.

Unlike Fortress and Blackstone, which have substantial private equity operations, Och-Ziff appears to be the first pure-play American hedge fund to seek an initial offering. As such, it offers a rare glimpse into the performance, asset growth and profitability of these kinds of firms. Hedge fund managers earn a management fee of about 2 percent of assets as well as about 20 percent of the profits.

Och-Ziff’s assets under management have grown rapidly, to almost $27 billion from $5.7 billion at the end of 2003, according to the firm’s prospectus. Its returns in recent years have not notably surpassed those of the S.& P. 500-stock index: for the last three years it had an identical return, and for the last year it returned 15.7 percent compared with the index’s 15.2 percent. Since inception, the main fund returned 17 percent compared with 11.6 percent for the S.& P. 500.

But in a point it will be sure to make to prospective investors, Och-Ziff has delivered those returns with less risk. Since 1994, the S.& P. 500 has been almost three times as volatile, and over the last year the broad market index has been more than four times as volatile.

“Achieving the same level of return while taking less risk is a commendable goal for investors,” said Ted Seides, director of investments at Protégé Partners, a fund of hedge funds, “though it’s not always the case that a lower volatility of returns equates to less risk.”

In 2006, Och-Ziff made $954 million in management fees and incentive income, up 93 percent from 2005. It paid $185 million in compensation and benefits. The firm has 300 people, 125 of whom are investment professionals and 18 are partners.

Hedge fund managers are allowed to defer their income offshore if they manage offshore funds — which are often set up to allow tax-exempt investors, like endowments, and foreigners to invest without facing taxes in the United States. Och-Ziff’s managers have about $1.8 billion in deferred income. The fund’s principals will invest all of the proceeds from the initial public offering back into the funds, where it will have to remain for five years.

Like Fortress and Blackstone, Och-Ziff plans to offer a stake in its management company, organizing itself as a master limited partnership that gives public investors limited say in the firm’s governance. Unions led by the A.F.L.-C.I.O. have led the charge against these private equity firms’ going public, and members of Congress have taken notice. The bill introduced last month by the top two members of the Senate Finance Committee would more than double the tax rates on carried interest.

Yet the Senate bill gives Fortress and Blackstone a five-year grace period on the higher tax rates, a concession not available to Och-Ziff. That may not matter eventually: the House’s legislation would eliminate the transition period, and Senator Max Baucus, one of the sponsors of the Senate bill, said he was open to narrowing that time frame.

The firm plans to trade on the New York Stock Exchange under the ticker symbol OZM.