Money managers under the microscope
The infamous “2 and 20″ scheme once reserved for a few stars is now the standard. Master and mediocre managers alike charge the same top-tier prices. Yet 2 percent fees for assets under management plus 20 percent of a fund’s profits should be exceptional pay for the best managers, he said, not the rule.
“Pricing in the investment management business was very uniform, and it shouldn’t be,” said Howard Marks, chairman of Oaktree Capital Management, a Los Angeles firm that manages $60 billion alternative investments. “If markets are working right, different things have different prices.”
Marks, who recently told Reuters the biggest distressed bargains were already behind us, observed investors during the good times didn’t asset themselves when negotiating terms with fund managers since they didn’t want to risk missing out on the gains.
In a recent “Chairman’s Memo” to investors, Marks observed incentive fees “should go only to managers with the skill needed to add enough to returns to more than offset the fees.” To illustrate, he noted a credit hedge fund charging 2 and 20 fees would have to earn a 16-3/8 percent gross return to achieve the same net results as a fund generating 12 percent return but charging a 0.5 percent fee.
The rush by traditional asset managers to embrace absolute return products has failed to impress investors, who are now switching to cheaper, passive investing. But what will fill the revenue hole left by these high margin products is far from clear.
Aymeric Poizot, a senior director at Fitch Ratings, points out that many of the alternative offerings developed by traditional managers in the boom years have been quietly wound up, or had their resources reduced. For example, Fortis Investments has closed some of its internal hedge funds, whilst heavy redemptions have hit alternative offerings at Credit Agricole. SSgA also wound up its own hedge fund unit at the end of 2007.
As politicians and regulators worldwide prepare a new blueprint to marshall the hedge fund industry, the organisers of the GAIM industry conference release the early agenda for their annual Monaco pow wow.
Unsurprisingly, the June 16-18 summit takes the theme: Transformation In A New World Order. And even less surprisingly, several sessions are set to ponder how to best snag a new breed of circumspect investors, and how to adapt to a new regulatory environment.