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have become more valuable than their parents. One can buy the parent for less than the value of its holding in the subsidiary. Boards are therefore taking corporate action. Examples include General Motors spinning off GM Hughes and Bell Canada spinning off Nortel.

The distressed credit unit is different from the other disciplines regarding liquidity, duration of investment, and potential mark-to-market loss. The special situations part of the business includes spin-offs, split-offs, liquidations, recapitalizations, reorganizations, divestitures, and share class discrepancies. Market exposure here is fully hedged.

"It is a very diversified portfolio," says Och. Opportunities determine portfolio composition; there is no predetermined commitment to a given investment discipline.

EUROPEAN COMPONENT

Currently, about 25 percent of the overall portfolio focuses on Europe. Four years ago, when the firm didn't have an office in London, that percentage was quite small. Now that 25 percent is fairly constant. The London office, which opened in August 1999, has been critical in the diversification of the portfolio. Having an office in Europe has been essential to Och-Ziff's ability to analyze and invest in European deals.

Of the merger arbitrage portfolio, about 35 percent is invested in European arbitrage and 65 percent in the United States. The U.S. team has seven analysts and the European team has four.

In convertible arbitrage, new opportunities are being found globally. The majority of the convertible portfolio is comprised of Western European and Japanese bonds.

BOTTOM-UP DECISION MAKING

The firm is research-driven with bottom-up decision making. Qualitative and quantitative analysis are used. Och emphasizes that while sophisticated analytics and tools are used, all decision making is done by people. Quantitative aspects are used to hedge equity currency and interest rate exposure. The firm focuses on specific assignment of responsibility for all positions and exposures; portfolio diversification; monitoring of industry exposure; and risk analysis, including embedded optionality.