Author Topic: Can a hedge fund/partnership legally reimburse for losses?  (Read 730 times)

stahleyp

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Can a hedge fund/partnership legally reimburse for losses?
« on: September 22, 2017, 09:05:12 AM »
Hey all,

I tried searching for this but no luck.

Buffett agreed to reimburse his original partners for losses. I think Pabrai did this too. I want to say that I read somewhere that it was not legal to do "make a client whole" today but is that right? Can an investment manager make a client whole?
Paul


TwoCitiesCapital

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Re: Can a hedge fund/partnership legally reimburse for losses?
« Reply #1 on: September 22, 2017, 12:46:44 PM »
Hey all,

I tried searching for this but no luck.

Buffett agreed to reimburse his original partners for losses. I think Pabrai did this too. I want to say that I read somewhere that it was not legal to do "make a client whole" today but is that right? Can an investment manager make a client whole?

I don't know if it's "illegal" to do so - but it was my understanding that it's against the current regulations to suggest that you would. The problem is in the suggesting/promising you will - not necessarily in the doing.

Scenario A: You lose money and surprise clients by making them whole. (This is probably ok).
Scenario B: You tell clients you will make them whole if you lose money (This is not ok).

Also, it may change if clients are sophisticated, accredited investors. I know that you are unable to have an incetive fee type structure (i.e. a hurdle rate) with normal retail investors...even if it's in their favor.

Jurgis

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Re: Can a hedge fund/partnership legally reimburse for losses?
« Reply #2 on: September 22, 2017, 01:03:54 PM »
I know that you are unable to have an incetive fee type structure (i.e. a hurdle rate) with normal retail investors...even if it's in their favor.

Mutual funds can have incentive fee structure. And there are (mutual fund?) managers who reimburse fees like Chou.

(The whole "incentive fees not allowed for hedge funds for retail investors" is weird although I kinda know where it came from.)

TwoCitiesCapital

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Re: Can a hedge fund/partnership legally reimburse for losses?
« Reply #3 on: September 22, 2017, 01:49:07 PM »
I know that you are unable to have an incetive fee type structure (i.e. a hurdle rate) with normal retail investors...even if it's in their favor.

Mutual funds can have incentive fee structure. And there are (mutual fund?) managers who reimburse fees like Chou.

(The whole "incentive fees not allowed for hedge funds for retail investors" is weird although I kinda know where it came from.)

I hadn't thought of mutual funds - was thinking of hedge funds and RIAs. Thanks for pointing that out!

stahleyp

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Re: Can a hedge fund/partnership legally reimburse for losses?
« Reply #4 on: September 24, 2017, 04:26:22 AM »
With mutual funds, I've seen this:

https://www.cbsnews.com/news/should-you-buy-the-fund-that-pays-you-to-own-it/

Anyone know how Pabrai pulled it off (unless the rules have changed since then)?
Paul

Parsad

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Re: Can a hedge fund/partnership legally reimburse for losses?
« Reply #5 on: September 24, 2017, 09:20:00 PM »
Hey all,

I tried searching for this but no luck.

Buffett agreed to reimburse his original partners for losses. I think Pabrai did this too. I want to say that I read somewhere that it was not legal to do "make a client whole" today but is that right? Can an investment manager make a client whole?

What you cannot do is guarantee that partners will not lose money, and you also cannot guarantee to make some partners whole from the capital of other limited partners.  You can certainly redistribute your own GP stake to limited partners, but this may create some tax issues as the partnership is a flow-through vehicle. 

We are doing this with one of our partners in the Canadian fund which we are closing, who put money in about a year before we decided to close.  While we have no obligation to make him/her whole, we felt that our decision to close was contrary to the expectations he/she had when he/she invested, and felt we would be around for a long time.

There are very few managers...you can probably count them on both hands...who have ever made partners whole, either through a partnership or mutual fund.  99% of managers would say that is the risk the investor takes.  That is correct to a certain degree, but I think common sense and discretion should also be part of any fiduciary's responsibilities.  Cheers!
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