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.