Uber hedge fund managers Och-Ziff and Brookside Capital will reinstate hefty 20% performance fees next year – even if they haven’t yet recovered 2008 losses for investors.
It turns out that the high-water marks they use for outperformance calculation expire after just one year.
Nice, now they can wipe the crisis from memory.
The news is pretty annoying for any investor left underwater. Essentially, you could be charged 20% performance fees just to make back the money they lost you. Given you likely paid 20% the first time around, this amounts to paying 20% twice, in addition to 1-2% management fees as well.
Bloomberg: In response to an analyst’s question on a first-quarter earnings call, Dan Och, Och-Ziff’s founder, said investors hadn’t complained about its terms. “We have not had discussions or comments with investors in terms of the high-water mark.” he said. “I think they’re focused on what we’re focused on: generating the performance.”
Technically, investors can simply leave the funds if they disagree. Yet the reality is that these mega funds receive most of their allocations from large institutions such as endowments, pension funds, and fund of funds. The managers of these large institutions are likely closer personally with their counterparts in the hedge funds than with the thousands of smaller investors they represent. Some might walk due to the fee arrangement, but most probably won’t.
This is because their actual investors are unlikely to realise that these funds’ faux-high-water-marks even exist.
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