Sculptor drama raises questions about hedge fund value

How much is a big hedge fund worth, with neither its founder at the helm nor his hand-picked successor? The answer seems to be roughly $731 million — the amount that a group led by Boaz Weinstein is bidding for Sculptor, the hedge fund formerly known as Och-Ziff.

Why it matters: Hedge funds, as companies, tend to be notoriously terrible investments. But once they're established and have reached a certain size, they do tend to retain something money managers value quite highly.

The big picture: Hedge funds are generally founded and controlled by a manager who takes home the lion's share of all revenues. That individual doesn't have any real incentive to dividend profits to passive investors.

• Hedge fund strategies tend to be relatively short-term, compared to venture capital or private equity. As a result, investors rarely face multi-year lock-ups and are likely to pull their money out when things are going badly.
• That flightiness of investor capital makes hedge fund assets under management highly volatile and very hard to value as an ongoing business.

Between the lines: Put aside the highly vituperative battle over whether Sculptor gets sold for $11.15 or $12.76 per share. After all, either way, the company is down more than 96% from its IPO price of $320. (Technically the IPO price was $32, but there was a 10-to-1 reverse stock split along the way to avoid being delisted.)

• The interesting part of the Sculptor takeover battle is that the Weinstein-led group intends to fire Sculptor chief Jimmy Levin.

The intrigue: Sculptor currently has about $34 billion in assets under management. The owners of that $34 billion wouldn't keep their money at Sculptor if they didn't want Levin to manage it. They're therefore likely to leave if he's fired. So, why would anybody want to pay $731 million for a company where many investors are certain to leave if you win the bidding?

• The answer is related to the reason why Sculptor still has $34 billion under management, even after its founder-CEO Dan Och left and after it paid a $213 million fine, as well as $136 million in restitution, for bribing mining companies in Africa.

Be smart: Hedge fund investors are much more likely to be large and staid institutions (think pension funds and university endowments peering carefully at Sharpe ratios) than they are to be thrill-seeking individuals looking for someone who can take their money on a rocket ship.

• Institutional investors care less about past returns than they do about structure — a coherent team of investment professionals, hired by a sophisticated HR operation, supported by a large and seasoned team of back-office and compliance folks, who have overseen dozens of quarters of impeccably reported returns.
• If there isn't a dominant ego betting it all on a high-conviction trade, so much the better.
• Conversely, such an ego might see real opportunity in owning a diversified hedge fund where he didn't call the investment shots.

The bottom line: The big names bidding for Sculptor — Weinstein's group includes Bill Ackman, Marc Lasry, and Jeff Yass — are not just hedge-fund managers; they're also hedge-fund owners, and know what investors value.

• Sometimes, that's access to the exceptional prowess of someone like Weinstein, Ackman, Lasry, or Yass. Often, however, it's something much more mundane.