Bloomberg: Och-Ziff, Bain to Resume Performance Fees in 2010
Sept. 1 (Bloomberg) — Och-Ziff Capital Management Group LLC and Bain Capital LLC plan to charge performance fees on hedge funds next year even if they fail to recoup their 2008 investment losses.
Most hedge funds don’t levy the fees, usually 20 percent of profits, until they climb back to their peak value, known as the high-water mark. New York-based Och-Ziff, which oversees $21.5 billion, and Bain’s Brookside Capital LLC of Boston, manager of $10 billion, resume the fees one year after an annual loss, according to investor agreements obtained by Bloomberg News.
Och-Ziff and Brookside risk angering investors, said Ron Geffner, a lawyer at New York-based Sadis & Goldberg LLP whose clients include hedge funds. Managers have sought to appease investors by easing withdrawal restrictions and providing more disclosure on holdings after losing an average of 19 percent last year.
“Investors can vote with their feet as other managers provide more favorable terms,” Geffner said.
Steve Bruce, a spokesman for Och-Ziff, declined to comment. Alex Stanton, a spokesman for Brookside, didn’t return calls seeking a comment.
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.”
Och-Ziff Funds
Och-Ziff’s OZ Master Fund Ltd., which had $14.4 billion in assets as of June 30, rose about 16 percent this year through July, after falling 16 percent in 2008. That’s about 2 percentage points away from erasing last year’s losses. Its other funds, the $2.96 billion OZ Europe Master Fund Ltd. and the $1.39 billion OZ Asia Master Fund Ltd., have to rise 10 percent and 17 percent, respectively, to recoup 2008’s decline.
Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising prices and participate substantially in profits from money invested.
Last year’s losses, the worst on record for the $1.4 trillion hedge-fund industry, mean that many firms are forgoing what had been the most lucrative portion of their fees. Investors also pay a management fee, usually 2 percent of assets.
Management Fees
The limitation could extend into 2010, depending on their gains. Firms relying on management fees might not earn enough to cover employee bonuses, forcing some to pay staff out of their own pockets or possibly shut down.
Funds have lost 21 percent on average since the end of October 2007. The industry’s previous biggest loss was 11 percent in 1998, according to data compiled by Chicago-based Hedge Fund Research Inc. Funds took an average of 11 months to return to their high-water marks, the company said.
Perry Capital LLC, the New York-based firm run by Richard Perry, also limits its performance-fee break to one year following an annual loss. Its Perry Partners International fund dropped about 26 percent in 2008. The fund climbed 16 percent this year through Aug. 21.
Perry decided this year to offer investors the choice of switching to a share class that charges a 10 percent performance fee after an annual decline. In exchange, the fund must return 250 percent of its loss before charging its standard 20 percent performance fee again.
Investors who choose the new share class will pay the 10 percent fee retroactively from the start of this year, according to a letter sent to investors last month.
Michael Neus, a spokesman for Perry, didn’t return calls seeking a comment.
Brookside Capital lost 17 percent last year before fees. The fund rose 9 percent this year through July before fees, meaning it would still need to return an additional 10 percent to make investors whole after 2008.
To contact the reporter on this story: Katherine Burton in New York at kburton@bloomberg.net
