7/5/2017 Oaktree founder attacks hedge fund fees

Howard Marks
Oaktree founder attacks hedge fund fees

FTfm
NOVEMBER 1, 2015 by: Madison Marriage

Just over a decade ago Howard Marks, the billionaire founder of Oaktree Capital, the
Los Angeles-based investment company, predicted investors would soon tire of paying
exorbitant fees to hedge fund managers.
The 69-year-olds prophecy appears to have come good, at least as far as recently
launched hedge funds are concerned.
Last month it emerged that performance fees charged by new hedge funds have
plunged to a seven-year low of 14.7 per cent. Management fees have risen, but not
enough to offset the reduction in income for hedge fund start-ups.

Mr Marks, described by Forbes magazine as Americas 317th richest individual, with

a net worth of $1.9bn, made his prediction in one of his widely followed memos to
investors in 2004.
But the financier, who was raised in the New York borough of Queens, is
disappointed that fee reductions have not been more pronounced across established
hedge funds.
The traditional two and 20 fee structure has barely budged over the past ten years.
The average fund charged a 1.7 per cent annual management fee and took 19.1 per cent
of performance gains in 2014, according to research by JPMorgan, the US bank.
Even more perturbing for Mr Marks, total assets in the industry have continued to
rise regardless, hitting an all-time high of $3tn last year.
I absolutely have a bad forecasting record, he says over tea at his companys
London office overlooking Hyde Park.
https://www.ft.com/content/1b2fb140-7f03-11e5-98fb-5a6d4728f74e 1/3
7/5/2017 Oaktree founder attacks hedge fund fees

He seems reluctant, however, to give up on the idea that the traditional fee model will
become obsolete.
If you go back 40 years, the number of [hedge fund] firms that were getting
incentive fees was minuscule. Now it is ubiquitous, and [these fees are being charged
by] 10,000 hedge funds, and many, many private equity firms, venture capital firms,
distressed debt funds, timber funds, everything.
The one thing I know is that 40 years ago all hedge funds were run by geniuses, and
there [were not many of them]. Today I am sure there are not 10,000 geniuses. It just
doesnt make sense. Nobody deserves 20 per cent carry unless they are exceptional.
Are the two hedge funds managed by Oaktree, which mainly focuses on distressed
debt and other niche credit strategies, exceptional enough to deserve such fees?
It is a hard question to answer, Mr Marks says. Sometimes yes, and sometimes no.
You put me in an embarrassing situation, because I cant badmouth our funds and I
dont want to overly praise our funds. But I think the performance has been good.
Mr Marks, who is officially his companys co-chairman but describes himself as its
chief culture officer, would like other cultural issues in the investment industry to be
addressed.
He is particularly concerned by the industrys short-term approach to pay and
measuring performance, as well as its obsession with individual star performers as
opposed to teams.
On his own pay, he says: I dont get a salary and I dont get a bonus. Other than the
value of the equity and trying to enhance it, I am really working for nothing.
He is no stranger to high pay, however. The financiers first job out of graduate school
was in the investment research department of Citibank, bringing him into the asset
management industry almost by chance.
I interviewed for jobs in seven different fields and ended up taking the job at
Citibank for the profound reason that I had worked there the previous summer and had
a good time. That is how I got into this business, he says.
After nearly 15 years at Citibank, where he worked as a portfolio manager focusing on
convertible bonds, Mr Marks left to join TCW, the US asset manager.
The billionaire is frank about his reasons for moving. [The draw of TCW] was mostly
economic: better pay. And they let me start a department for my activities and said they
would share the fruits.
A decade after joining TCW, where Mr Marks oversaw the groups domestic fixed
income team investing in distressed debt and high-yield bonds, he decided it was time
to set up his own company.
TCW was a big place and it did not have one core creed. As I rose in that
organisation, I had to speak for activities I did not really agree with, such as guessing
the direction of interest rates. We wanted to have a firm that ran our way.
Mr Marks, along with four TCW colleagues, set up Oaktree in 1995 using $10m of
their own money. To establish a clear company identity, they drew up eight business
principles and six investment tenets that are stated on the companys website and
drilled into all new employees.
Mr Marks summarises the companys mantra as producing an excellent product, not
making excuses when we have bad results and not taking credit for serendipitous events
when we have good performance.
He adds that the company charges all clients the same fee for similarly sized
mandates in a given asset class, shares its profits with staff generously and takes a
zero-tolerance approach to office politics.
[This mantra is] written down in every place. We cant get away from it, he says.
We have a strong culture and something we believe in, other than just making money.
But making money has been a helpful byproduct of these goals. Fast forward 20 years
since the company was established and Oaktree is now among the 150 largest
investment companies globally, according to Towers Watson, the investment
https://www.ft.com/content/1b2fb140-7f03-11e5-98fb-5a6d4728f74e 2/3
7/5/2017 Oaktree founder attacks hedge fund fees

consultancy.
Oaktrees assets under management rose to $103bn at the end of June, up by more
than a fifth since the end of 2013.
Mr Marks denies that becoming a $100bn fund house was ever an explicit target.
I can honestly say we did not have a goal, he says. We never talked about how big
we might get, we never had a budget, we never had a profit plan.
Although Oaktree appointed its first chief executive Jay Wintrob, the former chief
executive of American International Groups life and retirement division last year, Mr
Marks clearly has no intention of retiring any time soon.
I am old enough to stop work, and I dont get paid to work. I am doing it because it is
a gratifying and intellectually challenging way to spend the day, he says.
Will he still be writing those famous letters and the occasional hedge fund attack in a
decade? My hope is that I will write them for a long time to come, he says.

CV
Born 1946
Total pay No salary
Education 1967 BS in economics, Wharton School, University of Pennsylvania
1970 MBA, Booth School of Business, University of Chicago
Career 1969-78 Equity research analyst, Citicorp Investment Management.
Subsequently, director of research
1978-85 Vice-president and senior portfolio manager in charge of convertible and
high-yield securities, Citicorp
1985-95 Chief investment officer for domestic fixed income, TCW
1995 Founded Oaktree Capital

Oaktree Capital
Founded 1995
Assets under management $103bn (June 30 2015)
Employees More than 900
Headquarters Los Angeles

Print a single copy of this article for personal use. Contact us if you wish to print more to distribute to
others. The Financial Times Ltd.

https://www.ft.com/content/1b2fb140-7f03-11e5-98fb-5a6d4728f74e 3/3