Wall Street Journal- For publicly traded hedge funds like Och-Ziff Capital Management Group, bigger is better — and worse.

The bigger a hedge fund gets, the more it can earn in management and performance fees, which are tied to the amount of money it corrals. The problem is that as a hedge fund gets bigger, eye-popping returns are harder to come by. That is in part simply because of the law of large numbers, but also because there is a limited universe of investments that are liquid enough to move big amounts of money in and out of.

A research report by Citigroup analyst Prashant Bhatia distributed Monday highlights the conundrum faced by hedge-fund managers that have both public shareholders clamoring for fees and fund investors who care about returns. Mr. Bhatia initiated coverage on shares of Och-Ziff, which went public in mid-November, with an unenthusiastic “hold” rating.

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