Howard Marks, chairman of Oaktree Capital Group LLC, said hedge funds will have to stop charging clients 20 percent of investment profits unless they’re at the top of their peer group.
“For a client to give a manager 20 percent of the profits, the manager should be exceptional,” Marks, 67, said today at Barclays Plc’s financial-services conference in New York. “The exceptional will continue to deserve carry and presumably will get it. The unexceptional will not.”
Hedge funds, mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall, typically charge a 2 percent management fee and 20 percent of profits from investments as a carried interest, or carry. The funds’ average returns, about 6 percent to 7 percent annually over the past decade, don’t justify such fees, said Marks.
“There aren’t 10,000 exceptional people in this industry,” he said.
Oaktree, based in Los Angeles, is the world’s biggest investor in distressed debt, overseeing $76.4 billion in assets. The firm charges a 20 percent performance fee on most of its funds after they exceed an 8 percent net internal rate of return. Oaktree’s flagship debt funds since inception have returned an average 18 percent a year after fees as of June 30.