More recently, Och-Ziff shares dropped nearly 7 percent on Aug. 22 when a Bloomberg Businessweek story, "The Hedge Fund and the Despot," resurfaced allegations by U.K. human rights watchdog RAID that the hedge fund essentially financed political intimidation and violence in 2008 by Zimbabwean President Robert Mugabe by investing in a mining company that then gave a financial lifeline to the cash-strapped dictator's regime.
The Zimbabwean embassy in Washington, D.C., did not respond to a request for comment. A spokesman for Och-Ziff has denied any connection to the country's politics and described the investment as "passive."
"It doesn't get any uglier than that in terms of a headline," said one observer who counsels institutional investors on hedge funds and is not permitted to speak publicly about his clients' investments. The person said that while the bad press and underlying accusations weren't a deal breaker for investors, it could influence allocation decisions when viewed together with tepid returns.
"They hire a firm like Och-Ziff to be the 'sleep at night' fund," the person said. "When the ballast underperforms and gives you headline risk, it begs the question as to why it's there in the first place."
Morningstar analyst Stephen Ellis agreed that the firm's hedge fund clients could be spooked.
"Clients I think can be rightly concerned about Och-Ziff's investment processes and may feel a bit more leery about putting more assets with Och-Ziff," Ellis said.
Ellis and others have noted that some hedge fund investors were frustrated that they hadn't been notified separately of the government investigations besides the public disclosure in March.
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Ellis and other stock analysts are still optimistic despite those issues.
Ellis believes the stock's fair value is $15, although the target is down from $17 in April.
"In 2014, we can see clear signs of improvement at Och-Ziff," he wrote in a client note on Aug. 8 that noted the firm's expansion into credit and real estate offerings.
Citi's Katz has a "buy" rating on the stock with a price target of $15. He noted the growing appetite of institutional investors for alternative investments like hedge funds, especially large ones and those that can generate relatively smooth returns in both up and down markets.
Katz said that Och-Ziff's hedge fund performance was far more important than hits to its reputation.
"My outlook is positive," he said.
JPMorgan analyst Kenneth Worthington also recommends the stock and believes shares will rise to $17.
"We like Och-Ziff stock, and see upside in 2014/2015 based on multiple expansion, supported by a high dividend," Worthington wrote in a research report on Aug. 6.
A recent Goldman Sachs report was "neutral" on the stock with a price target of $13, slightly higher than the current price. The analysis said that the stock could rise on strong fund performance but said it could suffer because of "regulatory overhang, softer performance, slower flows (and) higher-than-expected expenses."
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—By CNBC's Lawrence Delevingne