Corner of Berkshire & Fairfax Message Board

General Category => General Discussion => Topic started by: skanjete on November 17, 2013, 09:38:22 AM

Title: Pabrai/Buffett partnership fee structure
Post by: skanjete on November 17, 2013, 09:38:22 AM
I understand that Pabrai copied the fee structure in his partnership from the Buffett partnerships : 25% on the profit above 6%.

I was wondering what happens after a down year. In a down year, there is no profit participation of course, but what happens thereafter? If I remember correctly, in the Buffett partnerships, there was no profit participation until all losses were made good.
But does this also count for the 6%? One never had the chance to check this for Buffett, because his partnerships never had a down year.

For example :
year 0 : start with 1000$
year 1 : - 20% : result 800$
year 2 : +50% : result 1200$

As I understood the fee structure from the Buffett partnership, (and I suppose thus now from Pabrai), the managing partner gets 0.25 x  (1200 - 1000 x 1.06 x 1.06) = 19.1$ after the second year.

Does anyone know if this is correct?
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Mephistopheles on November 17, 2013, 09:44:42 AM
That would make sense, although I'm not sure what the exact terms were either.

Didn't Buffett also have a fee structure where he took some of the losses? I think he got 50% of profits above 6% and took 25% of losses or something. Or rather he guaranteed a certain %.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Redskin212 on November 17, 2013, 10:00:06 AM
Skanjete,

Your calculation and understanding is correct.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: skanjete on November 17, 2013, 10:23:23 AM
In that case, the partners indeed do get a fair deal!

And is profit participation calculated for the partnership in its entirety or for each partner individually?
I'm asking this because, depending on extra investments or liquidations along the way, the result can be different for each partner individually.

If one partner invests extra money after year 1 (a down year), his losses will be recouped faster than the partner who doesn' t invest extra money,  and thus profit participation should kick in quicker for the extra investing partner.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: JBird on November 17, 2013, 10:37:07 AM
(B) A division of profits between the limited partners and general partner, with the first 6% per year to partners based upon beginning capital at market, and any excess divided one-fourth to the general partner and three-fourths to all partners proportional to their capital. Any deficiencies in earnings below the 6% would be carried forward against future earnings, but would not be carried back. Presently, there are three profit arrangements which have been optional to incoming partners:

Interest Provision. Excess to Gen. Partner. Excess to Ltd. Partners
(1) 6% 1/3 2/3
(2) 4% 1/4 3/4
(3) None 1/6 5/6

In the event of profits, the new division will obviously have to be better for limited partners than the first two arrangements. Regarding the third, the new arrangement will be superior up to 18% per year; but above this rate the limited partners would do better under the present agreement. About 80% of total partnership assets have selected the first two arrangements, and I am hopeful, should we average better than 18% yearly, partners presently under the third arrangement will not feel short-changed under the new agreement;

(C) In the event of losses, there will be no carry back against amounts previously credited to me as general partner. Although there will be a carry-forward against future excess earnings. However, my wife and I will have the largest single investment in the new partnership, probably about one-sixth of total partnership assets, and thereby a greater dollar stake in losses than any other partner of family group, I am inserting a provision in the partnership agreement which will prohibit the purchase by me or my family of any marketable securities. In other words, the new partnership will represent my entire investment operation in marketable securities, so that my results will have to be directly proportional to yours, subject to the advantage I obtain if we do better than 6.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: skanjete on November 17, 2013, 10:47:24 AM
JBird,

I suppose that's Buffett vintage. I think I read it in one of his partnership letters at the moment when he consolidated his separate partnerships into 1 partnership.
 
So since his partners had the choice between 1,2 or 3, I suppose the profit sharing is calculated per partner individually.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: racemize on November 17, 2013, 10:48:36 AM
JBird,

I suppose that's Buffett vintage. I think I read it in one of his partnership letters at the moment when he consolidated his separate partnerships into 1 partnership.
 
So since his partners had the choice between 1,2 or 3, I suppose the profit sharing is calculated per partner individually.

I believe that section indicates that the previous structures were 1, 2, or 3, and that he was consolidating into the 6%/25% structure.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: skanjete on November 17, 2013, 10:58:40 AM
JBird,

I suppose that's Buffett vintage. I think I read it in one of his partnership letters at the moment when he consolidated his separate partnerships into 1 partnership.
 
So since his partners had the choice between 1,2 or 3, I suppose the profit sharing is calculated per partner individually.

I believe that section indicates that the previous structures were 1, 2, or 3, and that he was consolidating into the 6%/25% structure.

Yes, I think you're correct. I was to fast with my conclusion.

But is profit participation then calculated individually or not? Because differences between partners can be quite substantial after years as 2008, 2009, depending on their follow up investments.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Parsad on November 17, 2013, 11:18:08 AM
JBird,

I suppose that's Buffett vintage. I think I read it in one of his partnership letters at the moment when he consolidated his separate partnerships into 1 partnership.
 
So since his partners had the choice between 1,2 or 3, I suppose the profit sharing is calculated per partner individually.

I believe that section indicates that the previous structures were 1, 2, or 3, and that he was consolidating into the 6%/25% structure.

Yes, I think you're correct. I was to fast with my conclusion.

But is profit participation then calculated individually or not? Because differences between partners can be quite substantial after years as 2008, 2009, depending on their follow up investments.

Yes, profit participation is calculated individually, as income, dividends, gains, losses have to allocated every time capital comes in or out.  So if you are accepting capital monthly, then you have to allocate income/losses monthly and set the new high watermark. 

It is definitely the most equitable way to pay a manager and also incentivize them.   You lose money for partners, it takes longer and longer to get paid.  You make money, you get paid.  You make a lot of money for partners, you get paid very well!

But, I believe that level of compensation works best in a system where capital can be taken away from the manager, not one where they have permanent access to it.  The more permanent the capital, the lower the incentive fee should be, as the amount of risk to the manager reduces over time.  Just my opinion!  Cheers!
Title: Re: Pabrai/Buffett partnership fee structure
Post by: skanjete on November 17, 2013, 11:37:59 AM
JBird,

I suppose that's Buffett vintage. I think I read it in one of his partnership letters at the moment when he consolidated his separate partnerships into 1 partnership.
 
So since his partners had the choice between 1,2 or 3, I suppose the profit sharing is calculated per partner individually.

I believe that section indicates that the previous structures were 1, 2, or 3, and that he was consolidating into the 6%/25% structure.

Yes, I think you're correct. I was to fast with my conclusion.

But is profit participation then calculated individually or not? Because differences between partners can be quite substantial after years as 2008, 2009, depending on their follow up investments.

Yes, profit participation is calculated individually, as income, dividends, gains, losses have to allocated every time capital comes in or out.  So if you are accepting capital monthly, then you have to allocate income/losses monthly and set the new high watermark. 

It is definitely the most equitable way to pay a manager and also incentivize them.   You lose money for partners, it takes longer and longer to get paid.  You make money, you get paid.  You make a lot of money for partners, you get paid very well!

But, I believe that level of compensation works best in a system where capital can be taken away from the manager, not one where they have permanent access to it.  The more permanent the capital, the lower the incentive fee should be, as the amount of risk to the manager reduces over time.  Just my opinion!  Cheers!

Parsad,

Thank you for your clarification.

We work very similarly, the only difference being that the treshold is 0% (instead of 6%) and 15% instead of 25%. I guess I was less confident when we started than Buffett or Pabrai, rightfully so, I might add. ;)
Actually, I hadn't read the Buffett partnership letters yet when we got started, but the arrangement just seemed to be a correct way of working. I had a day job back then managing construction projects, and my experience in that job too was that 15% was a cut that most people considered fair and correct. More than 15% didn't last because some people got frustrated, jealous or feeled like being taken advantage of.

Later on, I read the 6%-25% arrangement of Buffett (and Graham before him I think), and I proposed this way of working to some partners because I think it's even fairer for the partners, but most of them preferred our 0%-15% arrangement (this was before 2008  ;)), so it stayed that way.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: oddballstocks on November 17, 2013, 11:49:30 AM
The structure is fair, but has a hole in my view.  If you can't earn an incentive fee in the first year or two, or you start in a bad market there is no reason to stick around and try to earn out of that hole.

Maybe this works if you're independently wealthy, but if I'm running a fund, and I need a fee to pay for food/mortgage/kids I can't be waiting around forever hoping to eventually earn a fee.  I guess maybe this could become an advantage, if I do end up waiting for years I might not have to pay child support or alimony after my wife divorces me because I"ll have no income.

A sizable drop and a quick rebound, like what we just experienced isn't much of a problem, the fee might be lost for a year.  What kills this structure is multiple years of declines, or a flat market.

Not everyone can be Buffett, I applaud anyone who's done well with this structure, although there's an element of survivorship bias in it.  Where are the stories of managers who tried it, didn't make any money and shutdown their fund and started a new one?

I like a structure where the manager is paid something, enough that they're not worried about getting another job or taking crazy risks, yet they are incentivized if they do well.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Kraven on November 17, 2013, 12:03:39 PM
The structure is fair, but has a hole in my view.  If you can't earn an incentive fee in the first year or two, or you start in a bad market there is no reason to stick around and try to earn out of that hole.

Maybe this works if you're independently wealthy, but if I'm running a fund, and I need a fee to pay for food/mortgage/kids I can't be waiting around forever hoping to eventually earn a fee.  I guess maybe this could become an advantage, if I do end up waiting for years I might not have to pay child support or alimony after my wife divorces me because I"ll have no income.

A sizable drop and a quick rebound, like what we just experienced isn't much of a problem, the fee might be lost for a year.  What kills this structure is multiple years of declines, or a flat market.

Not everyone can be Buffett, I applaud anyone who's done well with this structure, although there's an element of survivorship bias in it.  Where are the stories of managers who tried it, didn't make any money and shutdown their fund and started a new one?

I like a structure where the manager is paid something, enough that they're not worried about getting another job or taking crazy risks, yet they are incentivized if they do well.

These are good points. I've never understood high water marks except as a matter of marketing and asset gathering. From the standpoint of managing money though why should someone have to make an investor whole before they get paid?  They did the work and oftentimes a loss is due at least in part to just overall market performance. My feeling is that unless lookups are unreasonable if someone isn't happy with performance take your money out and fire the guy.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Parsad on November 17, 2013, 11:26:09 PM
The structure is fair, but has a hole in my view.  If you can't earn an incentive fee in the first year or two, or you start in a bad market there is no reason to stick around and try to earn out of that hole.

Maybe this works if you're independently wealthy, but if I'm running a fund, and I need a fee to pay for food/mortgage/kids I can't be waiting around forever hoping to eventually earn a fee.  I guess maybe this could become an advantage, if I do end up waiting for years I might not have to pay child support or alimony after my wife divorces me because I"ll have no income.

A sizable drop and a quick rebound, like what we just experienced isn't much of a problem, the fee might be lost for a year.  What kills this structure is multiple years of declines, or a flat market.

Not everyone can be Buffett, I applaud anyone who's done well with this structure, although there's an element of survivorship bias in it.  Where are the stories of managers who tried it, didn't make any money and shutdown their fund and started a new one?

I like a structure where the manager is paid something, enough that they're not worried about getting another job or taking crazy risks, yet they are incentivized if they do well.

In our Canadian Fund, we did not receive an incentive fee for the first five years.  Not many managers could survive that long without some form of payment.  But I think that type of survivorship is good for the industry.  There are way too many, in fact the vast majority of investment managers, making a paycheck while adding zero value for their investors that could not be achieved through passive ETF's. 

These are good points. I've never understood high water marks except as a matter of marketing and asset gathering. From the standpoint of managing money though why should someone have to make an investor whole before they get paid?  They did the work and oftentimes a loss is due at least in part to just overall market performance. My feeling is that unless lookups are unreasonable if someone isn't happy with performance take your money out and fire the guy.

If an investment manager does a good job, at some point in time they would receive incentive fees, and generally the better the job, the greater the compensation.  So the high watermark is irrelevant in terms of the manager getting paid.  The truth is, that most managers want to manage money, but not take the risk and costs associated with an incentive fee structure without any fixed management expense ratio.  It's nice if you have $50M under management and get "1 & 15", because you are guaranteed $500K a year...whether you do well or not.  Even if you manage $10M, that's a decent $100K a year...which manager is going to sweat making $100K a year for doing nothing?

And that is where the high watermark becomes incredibly important for incentivizing the manager.  You lose money, and it may be years before you get paid again.  Thus, you better be making good decisions short-term and long-term regardless of where the market goes!  Cheers!
Title: Re: Pabrai/Buffett partnership fee structure
Post by: skanjete on November 18, 2013, 12:09:38 AM
And that is where the high watermark becomes incredibly important for incentivizing the manager.  You lose money, and it may be years before you get paid again.  Thus, you better be making good decisions short-term and long-term regardless of where the market goes!  Cheers!

That's essential. As a partner or client you want you manager to be focused on the most important thing, which  (in my view) is risk.

In the example of Buffett/Pabrai, if they lose the first year 20%, they have to make make more than 40% (i.e. 1.06 x 1.06 / 0.8) the second year just to start earning something. If it takes them 2 years to make up, they have to make 22% annualised for 2 years before earning something (i.e. sqrt(1.06 x 1.06 x 1.06 / 0.8)) .
So losing big percentages is a disaster. and the only way to do well for the manager is to deliver consistent and substantial overperformance.

The manager has a fantastic advantage since he is asymetrically leveraged, just like Berkshire Hathaway with it's float. So I think it's only fair to have some downside as well in that an underperforming manager could have to wait a very long time to earn something. If you don't add the downside, the thing gets to positively skewed for the manager, and he'll be tempted to focus too much on the rewards, and not enough on the risks of the investment process.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: skanjete on November 18, 2013, 12:23:24 AM
The structure is fair, but has a hole in my view.  If you can't earn an incentive fee in the first year or two, or you start in a bad market there is no reason to stick around and try to earn out of that hole.

Maybe this works if you're independently wealthy, but if I'm running a fund, and I need a fee to pay for food/mortgage/kids I can't be waiting around forever hoping to eventually earn a fee.  I guess maybe this could become an advantage, if I do end up waiting for years I might not have to pay child support or alimony after my wife divorces me because I"ll have no income.

A sizable drop and a quick rebound, like what we just experienced isn't much of a problem, the fee might be lost for a year.  What kills this structure is multiple years of declines, or a flat market.

Not everyone can be Buffett, I applaud anyone who's done well with this structure, although there's an element of survivorship bias in it.  Where are the stories of managers who tried it, didn't make any money and shutdown their fund and started a new one?

I like a structure where the manager is paid something, enough that they're not worried about getting another job or taking crazy risks, yet they are incentivized if they do well.


I like the idea of a manager who is already financially independent.
Because if he has a track record that is worthwile, he'll be already a long way towards financial independance.
Secondly, as a partner, you don't want your manager to be pressured to take unnecessary risks because he needs the fee money to survive.
For an investor, patience is no luxury, it is a neccessity, and if your manager is being pressured by debt or by income problems, the first thing to go is the patience, and with it the rationality and prudence.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Kraven on November 18, 2013, 06:14:19 AM
These are good points. I've never understood high water marks except as a matter of marketing and asset gathering. From the standpoint of managing money though why should someone have to make an investor whole before they get paid?  They did the work and oftentimes a loss is due at least in part to just overall market performance. My feeling is that unless lookups are unreasonable if someone isn't happy with performance take your money out and fire the guy.

If an investment manager does a good job, at some point in time they would receive incentive fees, and generally the better the job, the greater the compensation.  So the high watermark is irrelevant in terms of the manager getting paid.  The truth is, that most managers want to manage money, but not take the risk and costs associated with an incentive fee structure without any fixed management expense ratio.  It's nice if you have $50M under management and get "1 & 15", because you are guaranteed $500K a year...whether you do well or not.  Even if you manage $10M, that's a decent $100K a year...which manager is going to sweat making $100K a year for doing nothing?

And that is where the high watermark becomes incredibly important for incentivizing the manager.  You lose money, and it may be years before you get paid again.  Thus, you better be making good decisions short-term and long-term regardless of where the market goes!  Cheers!

I was making a different point.  I don't disagree with the incentives, but if I am a manager and I lose money in 2008 it's not necessarily because I didn't make good decisions.  In fact, I was probably sweating it out and ruining my life for my clients.  And what do I get in return?  I have to work for free (other than my base fee) for years.  Why is that the proper way to incentivize someone?  Why not just say "if you're unhappy with me, take your money out".  If you go to a doctor and he treats you, but you still die, the bill is still outstanding.  He doesn't waive the fee.  To me, the incentives aren't necessarily aligned with highwater marks.  If I lose too much money, I'll just walk away and open a new fund.  Now maybe I'll have trouble raising money, but maybe not.  Either way, why should I kill myself when it might take years for incentives to kick back in and frankly, even if I do well clients have short term memories and the second things get better they probably still pull their money and give it to someone else. 
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Ham Hockers on November 18, 2013, 06:24:47 AM
but if I am a manager and I lose money in 2008 it's not necessarily because I didn't make good decisions.  In fact, I was probably sweating it out and ruining my life for my clients.  And what do I get in return?  I have to work for free (other than my base fee) for years.  Why is that the proper way to incentivize someone? 

So do you turn down your fees when you benefit from a hot market?
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Kraven on November 18, 2013, 07:12:56 AM
but if I am a manager and I lose money in 2008 it's not necessarily because I didn't make good decisions.  In fact, I was probably sweating it out and ruining my life for my clients.  And what do I get in return?  I have to work for free (other than my base fee) for years.  Why is that the proper way to incentivize someone? 

So do you turn down your fees when you benefit from a hot market?

No.  You missed the point.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Ham Hockers on November 18, 2013, 08:05:00 AM
No.  You missed the point.

I got your point.

Your point, that a HWM may misalign interests, partly hinges on your belief that a manager should not be punished for having poor performance which is undeserved (2008). So I asked if you would return your fees in a hot market. i.e. why should you be paid on gains that are not deserved?
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Kraven on November 18, 2013, 08:11:35 AM
No.  You missed the point.

I got your point.

Your point, that a HWM may misalign interests, partly hinges on your belief that a manager should not be punished for having poor performance which is undeserved (2008). So I asked if you would return your fees in a hot market. i.e. why should you be paid on gains that are not deserved?

When you get the point, I will respond.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Ham Hockers on November 18, 2013, 08:17:48 AM
To me, the incentives aren't necessarily aligned with highwater marks.  If I lose too much money, I'll just walk away and open a new fund.

Whoever wrote this quote is clearly missing your point.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: oddballstocks on November 18, 2013, 08:34:49 AM
The structure is fair, but has a hole in my view.  If you can't earn an incentive fee in the first year or two, or you start in a bad market there is no reason to stick around and try to earn out of that hole.

Maybe this works if you're independently wealthy, but if I'm running a fund, and I need a fee to pay for food/mortgage/kids I can't be waiting around forever hoping to eventually earn a fee.  I guess maybe this could become an advantage, if I do end up waiting for years I might not have to pay child support or alimony after my wife divorces me because I"ll have no income.

A sizable drop and a quick rebound, like what we just experienced isn't much of a problem, the fee might be lost for a year.  What kills this structure is multiple years of declines, or a flat market.

Not everyone can be Buffett, I applaud anyone who's done well with this structure, although there's an element of survivorship bias in it.  Where are the stories of managers who tried it, didn't make any money and shutdown their fund and started a new one?

I like a structure where the manager is paid something, enough that they're not worried about getting another job or taking crazy risks, yet they are incentivized if they do well.


I like the idea of a manager who is already financially independent.
Because if he has a track record that is worthwile, he'll be already a long way towards financial independance.
Secondly, as a partner, you don't want your manager to be pressured to take unnecessary risks because he needs the fee money to survive.
For an investor, patience is no luxury, it is a neccessity, and if your manager is being pressured by debt or by income problems, the first thing to go is the patience, and with it the rationality and prudence.

This is the current reality, the only people who can get into investment management either are young and have no expenses, or those who are older and already made enough money that day to day expenses aren't an issue.  This eliminates anyone who decides they'd like to have a family, which is probably why working all of the time is lauded for investment managers, they're either young or beyond kids.

Why would someone who's financially independent take on someone else's money to manage?  Managing money for someone else is not the same as managing your own money, it's much more stressful, with more responsibility.  If you are well off why add that to your life.  If I were financially independent I would not be managing outside money as something fun, I would probably manage my own money and spend time on things I wanted to do like skiing, biking etc.

The way for someone to manage money who has a family on their own appears to be as a RIA who builds a considerable book of business and earnings a straight fee, or for someone who's wealthy parents/relatives bankroll their living expenses while they build up AUM.  The second route is all about connections, if you come from a wealthy family I'd imagine it would be easy to collect assets which means you wouldn't need to live on your parents money for long.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Edward on November 18, 2013, 08:54:25 AM
The structure is fair, but has a hole in my view.  If you can't earn an incentive fee in the first year or two, or you start in a bad market there is no reason to stick around and try to earn out of that hole.
We have a fee structure of 0.5% - 10% in our company. I absolutely agree with the sentiment voiced by oddballstocks and this is the reason we chose this structure.

If you take only a performance based fee and bear the expenses, it is a very risky proposition. You might be unlucky for a few years and if your cost structure isn't very low you're going to be under massive pressure, not to say anything about trivial stuff such as food and shelter while you're at it.


Title: Re: Pabrai/Buffett partnership fee structure
Post by: Parsad on November 18, 2013, 09:11:54 AM
The structure is fair, but has a hole in my view.  If you can't earn an incentive fee in the first year or two, or you start in a bad market there is no reason to stick around and try to earn out of that hole.
We have a fee structure of 0.5% - 10% in our company. I absolutely agree with the sentiment voiced by oddballstocks and this is the reason we chose this structure.

If you take only a performance based fee and bear the expenses, it is a very risky proposition. You might be unlucky for a few years and if your cost structure isn't very low you're going to be under massive pressure, not to say anything about trivial stuff such as food and shelter while you're at it.

True, but like any real entrepreneurial endeavour, risk and sacrifice play a very significant part.  We run our business very lean, because if we didn't, we would have been out of business by now.  I think those habits are learned very quickly when everything is at risk. 

A fixed expense ratio of any sort to cover the manager's office and living expenses somehow strikes me as a less efficient way to learn that experience.  And if you somehow manage to get through the first few years, especially when they came during the worst crisis in 70 years, you know you can probably get through anything going forward.  There's some definite value in that.  Cheers! 
Title: Re: Pabrai/Buffett partnership fee structure
Post by: oddballstocks on November 18, 2013, 09:15:11 AM
The structure is fair, but has a hole in my view.  If you can't earn an incentive fee in the first year or two, or you start in a bad market there is no reason to stick around and try to earn out of that hole.
We have a fee structure of 0.5% - 10% in our company. I absolutely agree with the sentiment voiced by oddballstocks and this is the reason we chose this structure.

If you take only a performance based fee and bear the expenses, it is a very risky proposition. You might be unlucky for a few years and if your cost structure isn't very low you're going to be under massive pressure, not to say anything about trivial stuff such as food and shelter while you're at it.

I like your structure, also enjoyed reading the letters on your site.  Great job on Renault, I looked at that one and passed, not exactly a brilliant decision..
Title: Re: Pabrai/Buffett partnership fee structure
Post by: skanjete on November 18, 2013, 10:20:22 AM
The structure is fair, but has a hole in my view.  If you can't earn an incentive fee in the first year or two, or you start in a bad market there is no reason to stick around and try to earn out of that hole.

Maybe this works if you're independently wealthy, but if I'm running a fund, and I need a fee to pay for food/mortgage/kids I can't be waiting around forever hoping to eventually earn a fee.  I guess maybe this could become an advantage, if I do end up waiting for years I might not have to pay child support or alimony after my wife divorces me because I"ll have no income.

A sizable drop and a quick rebound, like what we just experienced isn't much of a problem, the fee might be lost for a year.  What kills this structure is multiple years of declines, or a flat market.

Not everyone can be Buffett, I applaud anyone who's done well with this structure, although there's an element of survivorship bias in it.  Where are the stories of managers who tried it, didn't make any money and shutdown their fund and started a new one?

I like a structure where the manager is paid something, enough that they're not worried about getting another job or taking crazy risks, yet they are incentivized if they do well.


I like the idea of a manager who is already financially independent.
Because if he has a track record that is worthwile, he'll be already a long way towards financial independance.
Secondly, as a partner, you don't want your manager to be pressured to take unnecessary risks because he needs the fee money to survive.
For an investor, patience is no luxury, it is a neccessity, and if your manager is being pressured by debt or by income problems, the first thing to go is the patience, and with it the rationality and prudence.

This is the current reality, the only people who can get into investment management either are young and have no expenses, or those who are older and already made enough money that day to day expenses aren't an issue.  This eliminates anyone who decides they'd like to have a family, which is probably why working all of the time is lauded for investment managers, they're either young or beyond kids.

Why would someone who's financially independent take on someone else's money to manage?  Managing money for someone else is not the same as managing your own money, it's much more stressful, with more responsibility.  If you are well off why add that to your life.  If I were financially independent I would not be managing outside money as something fun, I would probably manage my own money and spend time on things I wanted to do like skiing, biking etc.

The way for someone to manage money who has a family on their own appears to be as a RIA who builds a considerable book of business and earnings a straight fee, or for someone who's wealthy parents/relatives bankroll their living expenses while they build up AUM.  The second route is all about connections, if you come from a wealthy family I'd imagine it would be easy to collect assets which means you wouldn't need to live on your parents money for long.

There is actually a third way, as suggested by Pabrai : you can combine a day time job with investing for some years until you have the needed funds.
That's the way we did it. We are not from wealthy families, haven't been supported, didn't have a financial background, we never inherited anything and we now have 4 children to support. But after some 10 years of combining a day time job with investing, we could choose to do whatever we wanted.
I agree with you however that it wouldn't be as easy to replicate this if you already have the kids. We could combine my day time job with managing the partnership and my wife's job until the 4th child came. Then I had to choose and give up my day time job.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Parsad on November 18, 2013, 10:33:19 AM
The structure is fair, but has a hole in my view.  If you can't earn an incentive fee in the first year or two, or you start in a bad market there is no reason to stick around and try to earn out of that hole.

Maybe this works if you're independently wealthy, but if I'm running a fund, and I need a fee to pay for food/mortgage/kids I can't be waiting around forever hoping to eventually earn a fee.  I guess maybe this could become an advantage, if I do end up waiting for years I might not have to pay child support or alimony after my wife divorces me because I"ll have no income.

A sizable drop and a quick rebound, like what we just experienced isn't much of a problem, the fee might be lost for a year.  What kills this structure is multiple years of declines, or a flat market.

Not everyone can be Buffett, I applaud anyone who's done well with this structure, although there's an element of survivorship bias in it.  Where are the stories of managers who tried it, didn't make any money and shutdown their fund and started a new one?

I like a structure where the manager is paid something, enough that they're not worried about getting another job or taking crazy risks, yet they are incentivized if they do well.


I like the idea of a manager who is already financially independent.
Because if he has a track record that is worthwile, he'll be already a long way towards financial independance.
Secondly, as a partner, you don't want your manager to be pressured to take unnecessary risks because he needs the fee money to survive.
For an investor, patience is no luxury, it is a neccessity, and if your manager is being pressured by debt or by income problems, the first thing to go is the patience, and with it the rationality and prudence.

This is the current reality, the only people who can get into investment management either are young and have no expenses, or those who are older and already made enough money that day to day expenses aren't an issue.  This eliminates anyone who decides they'd like to have a family, which is probably why working all of the time is lauded for investment managers, they're either young or beyond kids.

Why would someone who's financially independent take on someone else's money to manage?  Managing money for someone else is not the same as managing your own money, it's much more stressful, with more responsibility.  If you are well off why add that to your life.  If I were financially independent I would not be managing outside money as something fun, I would probably manage my own money and spend time on things I wanted to do like skiing, biking etc.

The way for someone to manage money who has a family on their own appears to be as a RIA who builds a considerable book of business and earnings a straight fee, or for someone who's wealthy parents/relatives bankroll their living expenses while they build up AUM.  The second route is all about connections, if you come from a wealthy family I'd imagine it would be easy to collect assets which means you wouldn't need to live on your parents money for long.

There is actually a third way, as suggested by Pabrai : you can combine a day time job with investing for some years until you have the needed funds.
That's the way we did it. We are not from wealthy families, haven't been supported, didn't have a financial background, we never inherited anything and we now have 4 children to support. But after some 10 years of combining a day time job with investing, we could choose to do whatever we wanted.
I agree with you however that it wouldn't be as easy to replicate this if you already have the kids. We could combine my day time job with managing the partnership and my wife's job until the 4th child came. Then I had to choose and give up my day time job.

Same thing!  No family money...no inheritance.  I used the investments I had saved up over the years as the backup support, and I did work on the side for Alnesh's accounting firm while launching and running the funds.  We launched Corner Market Capital with $25K raised from family and friends, and Alnesh and I initially only put $100 into the U.S. fund...just like Buffett did with his original partnerships. 

I also lead a very lean and frugal life for the first five years...even got rid of my beloved Mini!  Brown bagged it or ate very cheaply almost every day, public transport, office was at no or low-cost as I was doing some work for Alnesh, no fancy trips other than the usual Pabrai Funds/Fairfax Financial AGM's, no administrative assistants, and worked very hard to build a great track record.  We also had some great service providers that made our life easier!

Now we are the largest investors in the U.S. fund, and one of the largest in the Canadian fund.  We generated incentive fees pretty consistently this year in both funds.  I don't brown bag it anymore, but I still live a frugal life, including still taking public transport to the office...no stress, I can answer emails or read.  I only do occasional work for Alnesh's firm and run the funds from my terrific home office 2-3 days a week.  It's almost the perfect life for me now...just need to double our assets under management in the next couple of years and life could not be better!  Cheers!   



Title: Re: Pabrai/Buffett partnership fee structure
Post by: Palantir on November 18, 2013, 10:46:34 AM
wow 25k?
Title: Re: Pabrai/Buffett partnership fee structure
Post by: JBird on November 18, 2013, 10:48:26 AM
There is actually a third way, as suggested by Pabrai : you can combine a day time job with investing for some years until you have the needed funds.
That's the way we did it. We are not from wealthy families, haven't been supported, didn't have a financial background, we never inherited anything and we now have 4 children to support. But after some 10 years of combining a day time job with investing, we could choose to do whatever we wanted.
I agree with you however that it wouldn't be as easy to replicate this if you already have the kids. We could combine my day time job with managing the partnership and my wife's job until the 4th child came. Then I had to choose and give up my day time job.

That's commendable-- I have a lot of respect for that. Same for you Parsad!
Title: Re: Pabrai/Buffett partnership fee structure
Post by: hyten1 on November 18, 2013, 10:50:58 AM
parsad,

25k?! how can that be, the administrative/legal cost is almost hat no?

hy
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Parsad on November 18, 2013, 12:07:56 PM
parsad,

25k?! how can that be, the administrative/legal cost is almost hat no?

hy

The $25K was just to start Corner Market Capital and fund the original financing of the U.S. fund...we gave our family and friends 5% of the company for that!    The total set up costs for the U.S. fund were actually quite reasonable for the time...about $12.5K...and it was amortized back to partners over five years.  All three of our funds have been set up that way...the costs are amortized back to the partnership over 5 years. 

So essentially, we had about $12,500 left in Corner Market Capital when we launched that had to pay for all of our operating costs not paid by the actual funds.  I also had a couple of good years with that $12,500, so essentially I grew it to about $20K in two years, while still using about $5K a year for operating costs.  Now we have more than enough in investments and incentive fees in just the Canadian fund, where we can operate for the next ten years...and that's without bringing up any money from the U.S. general partner.

So when these large hedge funds go out of business, I haven't got the foggiest clue where exactly they spent their money...must be on lavish parties, travel, office space and excessive staffing.  Corner Market Capital and the MPIC Funds will not go out of business unless we choose to close and liquidate the funds...it certainly won't be because we can't afford the costs!  Cheers!   
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Ghost on November 18, 2013, 12:10:51 PM
Parsad,

So did you fund your living expenses from your own personal savings?
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Parsad on November 18, 2013, 12:14:23 PM
Parsad,

So did you fund your living expenses from your own personal savings?

Yes, and doing part-time contract work for Alnesh's accounting firm.  It was hard, but I wouldn't change anything and well worth it at the end.  I built it from scratch, making a ton of personal sacrifices, and fortunately with very good results over 7 years and now on our 8th!  Would have been very hard if I had a spouse and children.  Cheers!
Title: Re: Pabrai/Buffett partnership fee structure
Post by: hyten1 on November 18, 2013, 12:21:38 PM
parsad,

man you kick ass, that is awesome! lots of respect for what you did.

hy

parsad,

25k?! how can that be, the administrative/legal cost is almost hat no?

hy

The $25K was just to start Corner Market Capital and fund the original financing of the U.S. fund...we gave our family and friends 5% of the company for that!    The total set up costs for the U.S. fund were actually quite reasonable for the time...about $12.5K...and it was amortized back to partners over five years.  All three of our funds have been set up that way...the costs are amortized back to the partnership over 5 years. 

So essentially, we had about $12,500 left in Corner Market Capital when we launched that had to pay for all of our operating costs not paid by the actual funds.  I also had a couple of good years with that $12,500, so essentially I grew it to about $20K in two years, while still using about $5K a year for operating costs.  Now we have more than enough in investments and incentive fees in just the Canadian fund, where we can operate for the next ten years...and that's without bringing up any money from the U.S. general partner.

So when these large hedge funds go out of business, I haven't got the foggiest clue where exactly they spent their money...must be on lavish parties, travel, office space and excessive staffing.  Corner Market Capital and the MPIC Funds will not go out of business unless we choose to close and liquidate the funds...it certainly won't be because we can't afford the costs!  Cheers!   
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Edward on November 18, 2013, 01:01:36 PM
I like your structure, also enjoyed reading the letters on your site.  Great job on Renault, I looked at that one and passed, not exactly a brilliant decision..
Thank you for the compliment!   ;D 


25k?! how can that be, the administrative/legal cost is almost hat no?
Not really if you do it frugally. We launched our company with about 150K$ initially.

It cost 7K$ all in all to set up and costs around 3K$ to maintain annually, including all fixed costs.

Actually, thinking about it, knowing what I know today I could do the same thing for 3K$, and 2K$ in annual maintenance. No need to go for expensive fund structures before you have at least a few M$ AUM.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Parsad on November 18, 2013, 02:27:09 PM
I like your structure, also enjoyed reading the letters on your site.  Great job on Renault, I looked at that one and passed, not exactly a brilliant decision..
Thank you for the compliment!   ;D 


25k?! how can that be, the administrative/legal cost is almost hat no?
Not really if you do it frugally. We launched our company with about 150K$ initially.

It cost 7K$ all in all to set up and costs around 3K$ to maintain annually, including all fixed costs.

Actually, thinking about it, knowing what I know today I could do the same thing for 3K$, and 2K$ in annual maintenance. No need to go for expensive fund structures before you have at least a few M$ AUM.

Hi Edward,

The $3K doesn't include your audit costs does it?  Do you do the books yourself?  What about K-1's for the partners and the fund tax return...do you do them?  Way to keep it lean!  Cheers!
Title: Re: Pabrai/Buffett partnership fee structure
Post by: oddballstocks on November 18, 2013, 08:46:44 PM
Sanjeev,

Just wanted to say congrats on persevering, I could never do what you did, what you've accomplished is impressive!  I firmly believe that most success in life is showing up, you continued to show up through thick and thin, I can't imagine after all the 'lean' years how you won't have a number of 'fat' years as well.

Nate
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Edward on November 18, 2013, 09:06:30 PM
I like your structure, also enjoyed reading the letters on your site.  Great job on Renault, I looked at that one and passed, not exactly a brilliant decision..
Thank you for the compliment!   ;D 


25k?! how can that be, the administrative/legal cost is almost hat no?
Not really if you do it frugally. We launched our company with about 150K$ initially.

It cost 7K$ all in all to set up and costs around 3K$ to maintain annually, including all fixed costs.

Actually, thinking about it, knowing what I know today I could do the same thing for 3K$, and 2K$ in annual maintenance. No need to go for expensive fund structures before you have at least a few M$ AUM.

Hi Edward,

The $3K doesn't include your audit costs does it?  Do you do the books yourself?  What about K-1's for the partners and the fund tax return...do you do them?  Way to keep it lean!  Cheers!
3K$ annually is a very minimalist structure. No auditor fees (as substitute we attach the bank and broker balance statements to the financials as these include 99% of all assets). No trustee, no administrator. What it does include is annual company maintenance fees, and fixed annual bank/broker fees.

No general/limited partners structure - we incorporated in BVI as a "C" corporation with one class of shares. As a result we do not deal with tax authorities on the behalf of shareholders as a company but advise shareholders to file their own returns in their country (as the company is a separate corporate entity).

The upside is that there are almost no expenses/hassle in general. We set our own rules and avoid unnecessary expenses. Essentially, we leapfrogged towards the "Berkshire" structure without first going through a limited partnership route.

The obvious downside - it makes for a harder "sell" to prospective investors and advisers who are used to traditional, domestic, full fund structures.

Also there are some possible international taxation repercussions that vary from country to country and these have to be carefully examined before attempting this setup.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Parsad on November 18, 2013, 10:51:11 PM
I like your structure, also enjoyed reading the letters on your site.  Great job on Renault, I looked at that one and passed, not exactly a brilliant decision..
Thank you for the compliment!   ;D 


25k?! how can that be, the administrative/legal cost is almost hat no?
Not really if you do it frugally. We launched our company with about 150K$ initially.

It cost 7K$ all in all to set up and costs around 3K$ to maintain annually, including all fixed costs.

Actually, thinking about it, knowing what I know today I could do the same thing for 3K$, and 2K$ in annual maintenance. No need to go for expensive fund structures before you have at least a few M$ AUM.

Hi Edward,

The $3K doesn't include your audit costs does it?  Do you do the books yourself?  What about K-1's for the partners and the fund tax return...do you do them?  Way to keep it lean!  Cheers!
3K$ annually is a very minimalist structure. No auditor fees (as substitute we attach the bank and broker balance statements to the financials as these include 99% of all assets). No trustee, no administrator. What it does include is annual company maintenance fees, and fixed annual bank/broker fees.

No general/limited partners structure - we incorporated in BVI as a "C" corporation with one class of shares. As a result we do not deal with tax authorities on the behalf of shareholders as a company but advise shareholders to file their own returns in their country (as the company is a separate corporate entity).

The upside is that there are almost no expenses/hassle in general. We set our own rules and avoid unnecessary expenses. Essentially, we leapfrogged towards the "Berkshire" structure without first going through a limited partnership route.

The obvious downside - it makes for a harder "sell" to prospective investors and advisers who are used to traditional, domestic, full fund structures.

Also there are some possible international taxation repercussions that vary from country to country and these have to be carefully examined before attempting this setup.

I see, that makes sense.  Cheers!
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Parsad on November 18, 2013, 10:53:44 PM
Sanjeev,

Just wanted to say congrats on persevering, I could never do what you did, what you've accomplished is impressive!  I firmly believe that most success in life is showing up, you continued to show up through thick and thin, I can't imagine after all the 'lean' years how you won't have a number of 'fat' years as well.

Nate

Thanks Nate!  You know, if I only knew how hard it was going to be, and not what the final outcome is like now...I might not have done it back then!   ;D  It's only worth it once you've actually gone through it and come out the other end.  I can't imagine doing anything else now.  Cheers!
Title: Re: Pabrai/Buffett partnership fee structure
Post by: skanjete on November 18, 2013, 11:17:59 PM
There is actually a third way, as suggested by Pabrai : you can combine a day time job with investing for some years until you have the needed funds.
That's the way we did it. We are not from wealthy families, haven't been supported, didn't have a financial background, we never inherited anything and we now have 4 children to support. But after some 10 years of combining a day time job with investing, we could choose to do whatever we wanted.
I agree with you however that it wouldn't be as easy to replicate this if you already have the kids. We could combine my day time job with managing the partnership and my wife's job until the 4th child came. Then I had to choose and give up my day time job.

That's commendable-- I have a lot of respect for that. Same for you Parsad!

Thank you, JBird.
Sanjeev says he couldn't have done it with a spouse and children. I think I couldn't have done it without my wife. That's why I talked about "we" instead of "I". She has no interest whatsoever in investing, but makes everything possible by taking care of the family, while she also has her own business. I think that's a way greater achievement (combination of big family with business) than a man who combines 2 jobs.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: returnonmycapital on November 19, 2013, 07:25:12 AM
I like your structure, also enjoyed reading the letters on your site.  Great job on Renault, I looked at that one and passed, not exactly a brilliant decision..
Thank you for the compliment!   ;D 


25k?! how can that be, the administrative/legal cost is almost hat no?
Not really if you do it frugally. We launched our company with about 150K$ initially.

It cost 7K$ all in all to set up and costs around 3K$ to maintain annually, including all fixed costs.

Actually, thinking about it, knowing what I know today I could do the same thing for 3K$, and 2K$ in annual maintenance. No need to go for expensive fund structures before you have at least a few M$ AUM.

Hi Edward,

The $3K doesn't include your audit costs does it?  Do you do the books yourself?  What about K-1's for the partners and the fund tax return...do you do them?  Way to keep it lean!  Cheers!
3K$ annually is a very minimalist structure. No auditor fees (as substitute we attach the bank and broker balance statements to the financials as these include 99% of all assets). No trustee, no administrator. What it does include is annual company maintenance fees, and fixed annual bank/broker fees.

No general/limited partners structure - we incorporated in BVI as a "C" corporation with one class of shares. As a result we do not deal with tax authorities on the behalf of shareholders as a company but advise shareholders to file their own returns in their country (as the company is a separate corporate entity).

The upside is that there are almost no expenses/hassle in general. We set our own rules and avoid unnecessary expenses. Essentially, we leapfrogged towards the "Berkshire" structure without first going through a limited partnership route.

The obvious downside - it makes for a harder "sell" to prospective investors and advisers who are used to traditional, domestic, full fund structures.

Also there are some possible international taxation repercussions that vary from country to country and these have to be carefully examined before attempting this setup.

I am curious. With such low overheads, are you exempt from registering as an investment manager or adviser? In Ontario, I cannot professionally advise (or market) a fund, no matter what the fund structure, if I am not registered with the Ontario Securities Commission. Registration requirements include: annual registration dues ($1,000), liability insurance ($3,000), annual audit of the management company ($4-5,000), and minimum working capital at the management company ($100,000). Annual expenses of at least $8,000 and a constant existence of $100,000 of unencumbered capital.

I understand the annual expenses are much higher in the US, and the UK requires a professional address for the management company (or, at least, it used to).

Title: Re: Pabrai/Buffett partnership fee structure
Post by: oddballstocks on November 19, 2013, 07:31:52 AM
I like your structure, also enjoyed reading the letters on your site.  Great job on Renault, I looked at that one and passed, not exactly a brilliant decision..
Thank you for the compliment!   ;D 


25k?! how can that be, the administrative/legal cost is almost hat no?
Not really if you do it frugally. We launched our company with about 150K$ initially.

It cost 7K$ all in all to set up and costs around 3K$ to maintain annually, including all fixed costs.

Actually, thinking about it, knowing what I know today I could do the same thing for 3K$, and 2K$ in annual maintenance. No need to go for expensive fund structures before you have at least a few M$ AUM.

Hi Edward,

The $3K doesn't include your audit costs does it?  Do you do the books yourself?  What about K-1's for the partners and the fund tax return...do you do them?  Way to keep it lean!  Cheers!
3K$ annually is a very minimalist structure. No auditor fees (as substitute we attach the bank and broker balance statements to the financials as these include 99% of all assets). No trustee, no administrator. What it does include is annual company maintenance fees, and fixed annual bank/broker fees.

No general/limited partners structure - we incorporated in BVI as a "C" corporation with one class of shares. As a result we do not deal with tax authorities on the behalf of shareholders as a company but advise shareholders to file their own returns in their country (as the company is a separate corporate entity).

The upside is that there are almost no expenses/hassle in general. We set our own rules and avoid unnecessary expenses. Essentially, we leapfrogged towards the "Berkshire" structure without first going through a limited partnership route.

The obvious downside - it makes for a harder "sell" to prospective investors and advisers who are used to traditional, domestic, full fund structures.

Also there are some possible international taxation repercussions that vary from country to country and these have to be carefully examined before attempting this setup.

I am curious. With such low overheads, are you exempt from registering as an investment manager or adviser? In Ontario, I cannot professionally advise (or market) a fund, no matter what the fund structure, if I am not registered with the Ontario Securities Commission. Registration requirements include: annual registration dues ($1,000), liability insurance ($3,000), annual audit of the management company ($4-5,000), and minimum working capital at the management company ($100,000). Annual expenses of at least $8,000 and a constant existence of $100,000 of unencumbered capital.

I understand the annual expenses are much higher in the US, and the UK requires a professional address for the management company (or, at least, it used to).

I'm no expert, but I'm almost 100% positive fees in the US are much lower.  I know advisors aren't required to have $100k in working capital either.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: benhacker on November 19, 2013, 07:54:22 AM
Quote
I'm no expert, but I'm almost 100% positive fees in the US are much lower.  I know advisors aren't required to have $100k in working capital either.

I'm state registered (Oregon) and costs are very low.

Maybe I paid $500-800 in startup, ongoing is maybe $500 / year.  I do separate accounts, not a fund.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Edward on November 19, 2013, 08:09:53 AM
I am curious. With such low overheads, are you exempt from registering as an investment manager or adviser? In Ontario, I cannot professionally advise (or market) a fund, no matter what the fund structure, if I am not registered with the Ontario Securities Commission. Registration requirements include: annual registration dues ($1,000), liability insurance ($3,000), annual audit of the management company ($4-5,000), and minimum working capital at the management company ($100,000). Annual expenses of at least $8,000 and a constant existence of $100,000 of unencumbered capital.

I understand the annual expenses are much higher in the US, and the UK requires a professional address for the management company (or, at least, it used to).
We do not operate in the US or Canada, so I'm not familiar with your particular regulations.

However, I don't think that such registration would be required since the structure is a private company investing on the behalf of its shareholders, not outside investors or clients. The company does not advise anyone. Hence there is no need to register.

The usual fund structure includes a company acting as adviser to limited partnerships, and then you need to register because the company is providing advice to outside clients (the limited partners).
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Tim Eriksen on November 19, 2013, 09:02:43 AM
Quote
I'm no expert, but I'm almost 100% positive fees in the US are much lower.  I know advisors aren't required to have $100k in working capital either.

I'm state registered (Oregon) and costs are very low.

Maybe I paid $500-800 in startup, ongoing is maybe $500 / year.  I do separate accounts, not a fund.

Managing separate accounts is a lot easier.  In Washington state (one of the strictest) you need to pass a Series 63 test to be a Registered Investment Advisor.  It is wise to create an LLC for the management company, which will cost a few thousand bucks to set up.  Annual fees are just $70 for the LLC and FINRA dues which are probably $200.  Capital requirements are $10,000 or $35,000 if you have custody of assets.  The management company is not required to be audited.  No insurance required. 

Starting a fund is a lot pricier.  Initial offering documents are 10k to 35k.   You are required to have the fund audited (12k to 30k).  Outside administrator is strongly suggested.  That is another 8k to 20k.  Independent party (lawyer or accountant) to authorize all disbursements adds $200 to every disbursement including management fees or redemptions.  Same capital and insurance requirements.

We expected to launch with $3 million and only had 150k.  Being optimists we went ahead.  Small size means you either cover the overhead or face quite a headwind (2 to 5%).  I couldn't afford to cover the overhead and take virtually no income so we faced the headwind and survived.  Then 2008 happened.  Wouldn't have made it without some seed investors willing to take a chance.     
Title: Re: Pabrai/Buffett partnership fee structure
Post by: returnonmycapital on November 19, 2013, 09:35:04 AM
Quote
I'm no expert, but I'm almost 100% positive fees in the US are much lower.  I know advisors aren't required to have $100k in working capital either.

I'm state registered (Oregon) and costs are very low.

Maybe I paid $500-800 in startup, ongoing is maybe $500 / year.  I do separate accounts, not a fund.

Managing separate accounts is a lot easier.  In Washington state (one of the strictest) you need to pass a Series 63 test to be a Registered Investment Advisor.  It is wise to create an LLC for the management company, which will cost a few thousand bucks to set up.  Annual fees are just $70 for the LLC and FINRA dues which are probably $200.  Capital requirements are $10,000 or $35,000 if you have custody of assets.  The management company is not required to be audited.  No insurance required. 

Starting a fund is a lot pricier.  Initial offering documents are 10k to 35k.   You are required to have the fund audited (12k to 30k).  Outside administrator is strongly suggested.  That is another 8k to 20k.  Independent party (lawyer or accountant) to authorize all disbursements adds $200 to every disbursement including management fees or redemptions.  Same capital and insurance requirements.

We expected to launch with $3 million and only had 150k.  Being optimists we went ahead.  Small size means you either cover the overhead or face quite a headwind (2 to 5%).  I couldn't afford to cover the overhead and take virtually no income so we faced the headwind and survived.  Then 2008 happened.  Wouldn't have made it without some seed investors willing to take a chance.     

That makes sense to me and good on you for toughing it out. I don't know how much of a grip big institutions have on your fund industry but up here in Canada, our 5/6 banks control just about all of it by now and have huge marketing budgets. For fellows like Parsad, it has been no easy feat staying alive with performance only fee structures and some rough markets. 

Edward, you might look into registration wherever you reside. And be careful how you distribute your investment company shares. In the US/Canada/UK, and probably the rest of the developed world, an investment company is considered a fund, much like any group investment structure (or "scheme" in the UK). By distributing your investment company's shares to others, you are likely seen by regulators as advising. From a regulatory point of view, it also matters where those owners reside. If you solicit or are seen to be soliciting in any country that requires adviser registration, you could be forced to register in that country or face penalties.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: oddballstocks on November 19, 2013, 09:41:51 AM
Quote
I'm no expert, but I'm almost 100% positive fees in the US are much lower.  I know advisors aren't required to have $100k in working capital either.

I'm state registered (Oregon) and costs are very low.

Maybe I paid $500-800 in startup, ongoing is maybe $500 / year.  I do separate accounts, not a fund.

Managing separate accounts is a lot easier.  In Washington state (one of the strictest) you need to pass a Series 63 test to be a Registered Investment Advisor.  It is wise to create an LLC for the management company, which will cost a few thousand bucks to set up.  Annual fees are just $70 for the LLC and FINRA dues which are probably $200.  Capital requirements are $10,000 or $35,000 if you have custody of assets.  The management company is not required to be audited.  No insurance required. 

Starting a fund is a lot pricier.  Initial offering documents are 10k to 35k.   You are required to have the fund audited (12k to 30k).  Outside administrator is strongly suggested.  That is another 8k to 20k.  Independent party (lawyer or accountant) to authorize all disbursements adds $200 to every disbursement including management fees or redemptions.  Same capital and insurance requirements.

We expected to launch with $3 million and only had 150k.  Being optimists we went ahead.  Small size means you either cover the overhead or face quite a headwind (2 to 5%).  I couldn't afford to cover the overhead and take virtually no income so we faced the headwind and survived.  Then 2008 happened.  Wouldn't have made it without some seed investors willing to take a chance.     

Tim, congrats on persevering, did you take a job and run the fund on the side or just live off savings the entire time? 

Was the $150k the capital in your management firm, or your starting AUM?  I'm impressed by the people on this board who started with tiny sums and grew it.  If you don't mind sharing what have you been able to grow AUM to since, are you earning fees that cover the cost and provide a living now?

I love seeing these stories, cool examples of sticking to something and not giving up.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Edward on November 19, 2013, 10:01:31 AM
Edward, you might look into registration wherever you reside. And be careful how you distribute your investment company shares. In the US/Canada/UK, and probably the rest of the developed world, an investment company is considered a fund, much like any group investment structure (or "scheme" in the UK). By distributing your investment company's shares to others, you are likely seen by regulators as advising. From a regulatory point of view, it also matters where those owners reside. If you solicit or are seen to be soliciting in any country that requires adviser registration, you could be forced to register in that country or face penalties.
Correct.

When setting up such a structure as we have, you can't widely distribute shares. You're limited to around 50 shareholders and can't go on soliciting widely - you have to limit the offer to select private investors. Otherwise, you definitely need to set up a full fund structure with all the bells and whistles to appease local regulators.

The way to deal with this limit is to list the company on a stock exchange at some point when assets reach 5-10M$. This way you can widely distribute shares, gain permanent capital and shareholders retain liquidity. But until then you have to abide by certain limitations.

Repeat - this is not a traditional fund structure. Use with caution :)
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Tim Eriksen on November 19, 2013, 10:03:52 AM
I briefly had to work in late 2008 and early 2009.  In 2009 we rented our house and agreed to manage a storage facility with on site housing.  This eliminated housing costs and the "pay" covered utilities.  Did that for a year and a half until the seed deal was completed.  My wife had to work full time to provide income and medical benefits since 2008.  We have four kids so expenses are somewhat high.  She still works since the base income is not sufficient to cover our expenses.     

The 150k was the initial AUM in 2006.   It is almost $5 million now.  I did not think it wise to go with the Buffett/Pabrai fee structure and initially went with 2 and 20 with a 10% hurdle, calculated and assessed quarterly.  Later changed to 1.25 and 20 with no hurdle assessed at year end. While a bit more expensive at first glance it was combined with contributions into the fund by the seed investors which lowered overall overhead costs on a percentage basis by spreading it across a larger base.  So it was beneficial to existing investors.     
Title: Re: Pabrai/Buffett partnership fee structure
Post by: returnonmycapital on November 19, 2013, 10:06:18 AM
Edward, you might look into registration wherever you reside. And be careful how you distribute your investment company shares. In the US/Canada/UK, and probably the rest of the developed world, an investment company is considered a fund, much like any group investment structure (or "scheme" in the UK). By distributing your investment company's shares to others, you are likely seen by regulators as advising. From a regulatory point of view, it also matters where those owners reside. If you solicit or are seen to be soliciting in any country that requires adviser registration, you could be forced to register in that country or face penalties.
Correct.

When setting up such a structure as we have, you can't widely distribute shares. You're limited to around 50 shareholders and can't go on soliciting widely - you have to limit the offer to select private investors. Otherwise, you definitely need to set up a full fund structure with all the bells and whistles to appease local regulators.

The way to deal with this limit is to list the company on a stock exchange at some point when assets reach 5-10M$. This way you can widely distribute shares, gain permanent capital and shareholders retain liquidity. But until then you have to abide by certain limitations.

Repeat - this is not a traditional structure. Use with caution :)

I like that idea. Do you know what the expenses of listing and staying listed on a stock exchange are? I have heard of some listing in Ireland but don't know the costs involved.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: merkhet on November 19, 2013, 10:08:32 AM
I had a similar start to Tim.

I began in 2010 with a bit less than $400K in AUM using a different structure. After a year of showing that I could perform well, I distributed the capital back to my investors and started a hedge fund structure with a little less than $1 million in AUM. Now we have a little over $3 million in AUM two years later.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: returnonmycapital on November 19, 2013, 10:34:09 AM
Started a fund in 2007 with own money. Now bumping up against $30m. Performance fee only.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Edward on November 19, 2013, 10:48:02 AM
Edward, you might look into registration wherever you reside. And be careful how you distribute your investment company shares. In the US/Canada/UK, and probably the rest of the developed world, an investment company is considered a fund, much like any group investment structure (or "scheme" in the UK). By distributing your investment company's shares to others, you are likely seen by regulators as advising. From a regulatory point of view, it also matters where those owners reside. If you solicit or are seen to be soliciting in any country that requires adviser registration, you could be forced to register in that country or face penalties.
Correct.

When setting up such a structure as we have, you can't widely distribute shares. You're limited to around 50 shareholders and can't go on soliciting widely - you have to limit the offer to select private investors. Otherwise, you definitely need to set up a full fund structure with all the bells and whistles to appease local regulators.

The way to deal with this limit is to list the company on a stock exchange at some point when assets reach 5-10M$. This way you can widely distribute shares, gain permanent capital and shareholders retain liquidity. But until then you have to abide by certain limitations.

Repeat - this is not a traditional structure. Use with caution :)
I like that idea. Do you know what the expenses of listing and staying listed on a stock exchange are? I have heard of some listing in Ireland but don't know the costs involved.

I did a preliminary check on listing at the AIM in London. Supposedly, it costs around 20-30K$ for the initial listing and then around 10K$ every year after. This includes only the fees related to the exchange, I suppose that there could be some additional expenses but haven't figured out what those might be. I'm thinking this may actually be not a lot more as there are very little regulatory requirements at the AIM.

To be continued I suppose...  ::)
Title: Re: Pabrai/Buffett partnership fee structure
Post by: rohitc99 on November 19, 2013, 01:05:19 PM
this is a very useful discussion. I thought I was crazy trying to bootstrap a fund. the media does not help as it glorifies the 20 somethings who went from 0 to a billion in AUM in no time and are now masters of the universe.

considering the amount of experience, can someone give pointers on how to start a fund on a shoestring budget ...or put it another way ...what is the minimum AUM one needs (assuming a 1-10% kind of structure) to break even (on running the fund and not to sustain yourself)
Title: Re: Pabrai/Buffett partnership fee structure
Post by: oddballstocks on November 19, 2013, 01:10:31 PM
this is a very useful discussion. I thought I was crazy trying to bootstrap a fund. the media does not help as it glorifies the 20 somethings who went from 0 to a billion in AUM in no time and are now masters of the universe.

considering the amount of experience, can someone give pointers on how to start a fund on a shoestring budget ...or put it another way ...what is the minimum AUM one needs (assuming a 1-10% kind of structure) to break even (on running the fund and not to sustain yourself)

I'm interested in the response to both this, and a related question, what's the AUM point where the fund will pay the bills as well, say a $100k salary?
Title: Re: Pabrai/Buffett partnership fee structure
Post by: oddballstocks on November 19, 2013, 01:16:41 PM
I briefly had to work in late 2008 and early 2009.  In 2009 we rented our house and agreed to manage a storage facility with on site housing.  This eliminated housing costs and the "pay" covered utilities.  Did that for a year and a half until the seed deal was completed.  My wife had to work full time to provide income and medical benefits since 2008.  We have four kids so expenses are somewhat high.  She still works since the base income is not sufficient to cover our expenses.     

The 150k was the initial AUM in 2006.   It is almost $5 million now.  I did not think it wise to go with the Buffett/Pabrai fee structure and initially went with 2 and 20 with a 10% hurdle, calculated and assessed quarterly.  Later changed to 1.25 and 20 with no hurdle assessed at year end. While a bit more expensive at first glance it was combined with contributions into the fund by the seed investors which lowered overall overhead costs on a percentage basis by spreading it across a larger base.  So it was beneficial to existing investors.     

Tim,

Thanks for the answer and the transparency.  I have a lot of respect for someone trying to do this with kids, let alone four!  It's cool how you pieced different things together to continue to pursue the dream, very innovative with the storage facility and housing.

Nate
Title: Re: Pabrai/Buffett partnership fee structure
Post by: racemize on November 19, 2013, 01:24:30 PM
this is a very useful discussion. I thought I was crazy trying to bootstrap a fund. the media does not help as it glorifies the 20 somethings who went from 0 to a billion in AUM in no time and are now masters of the universe.

considering the amount of experience, can someone give pointers on how to start a fund on a shoestring budget ...or put it another way ...what is the minimum AUM one needs (assuming a 1-10% kind of structure) to break even (on running the fund and not to sustain yourself)

I'm interested in the response to both this, and a related question, what's the AUM point where the fund will pay the bills as well, say a $100k salary?

Well, this is mostly just a mathematical relationship.  A good estimate of start up costs (in the US) is ~25k.  Run-rate for very cheap fund (including Audit, Administrator, and whatnot) is 15-20k.  So then multiply expected returns after those costs by fee structure and AUM and get your result!
Title: Re: Pabrai/Buffett partnership fee structure
Post by: rohitc99 on November 19, 2013, 01:35:38 PM
this is a very useful discussion. I thought I was crazy trying to bootstrap a fund. the media does not help as it glorifies the 20 somethings who went from 0 to a billion in AUM in no time and are now masters of the universe.

considering the amount of experience, can someone give pointers on how to start a fund on a shoestring budget ...or put it another way ...what is the minimum AUM one needs (assuming a 1-10% kind of structure) to break even (on running the fund and not to sustain yourself)

I'm interested in the response to both this, and a related question, what's the AUM point where the fund will pay the bills as well, say a $100k salary?

Well, this is mostly just a mathematical relationship.  A good estimate of start up costs (in the US) is ~25k.  Run-rate for very cheap fund (including Audit, Administrator, and whatnot) is 15-20k.  So then multiply expected returns after those costs by fee structure and AUM and get your result!

thanks racemize. I think it comes to around 1-2 Mn AUM to break even (With several assumptions ofcourse). So to give up your day time job , I think we are talking of 5Mn AUM or higher if you have to support your family and feed them something beyond ramen :)
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Edward on November 19, 2013, 11:08:00 PM
thanks racemize. I think it comes to around 1-2 Mn AUM to break even (With several assumptions ofcourse). So to give up your day time job , I think we are talking of 5Mn AUM or higher if you have to support your family and feed them something beyond ramen :)
5M$ AUM is consistent with my own calculations for a full fund structure to break even after a reasonable salary/incentive for the investment manager.

The quotes I received for setting up a full fund structure in the BVI are similar - 20-30K$ initially, and around 15K$ annually. Needless to say with such costs you might have a few rough years in the beginning and I would advise to start with at least 300-500K$ AUM. However, 90% of success is showing up - so don't be discouraged.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: ageofsocrates on November 20, 2013, 02:09:29 AM
Started a fund in 2007 with own money. Now bumping up against $30m. Performance fee only.

Hi returnonmycapital,

Just curious. how's your track record? Where do u normally find your ideas (i.e gurufocus)?
Title: Re: Pabrai/Buffett partnership fee structure
Post by: watsa_is_a_randian_hero on November 20, 2013, 05:39:22 AM
I currently manage money in separate accounts, almost 2mm right now.  I've thought in order to do that full-time, I would need 10mm of outside money, or 3mm of my own money, or some combination thereof.  My hurdle for personal assets may be larger than others as I am very risk-adverse and fear of failure drives me to want a large nest egg before doing this full-time with a family to support.

Something I thought I would add to this thread, as I don't believe it has been mentioned.  Expenses such as auditor, admin, legal etc are typically considered "fund expenses" and paid out of the fund.  They would not reduce your fees.  That said, many small managers voluntarily pay for these expenses out of the management company so as to avoid burdening their fund with expenses, reducing their performance track record.  That said, if the expense is a legitimate fund expenses, it can be paid out of the fund, and larger funds do this all the time. 
Title: Re: Pabrai/Buffett partnership fee structure
Post by: bmichaud on November 20, 2013, 06:05:55 AM
Watsa,

That's interesting - I always thought the mgmt fee was to cover audit, admin, legal, custodial etc...? I know hedge funds do not report an "expense ratio" like mutual funds do, but are all of these expenses taken into account in the "expense ratio"? i.e. expense ratio = mgmt fee + fund expenses?
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Edward on November 20, 2013, 06:48:53 AM
That's interesting - I always thought the mgmt fee was to cover audit, admin, legal, custodial etc...? I know hedge funds do not report an "expense ratio" like mutual funds do, but are all of these expenses taken into account in the "expense ratio"? i.e. expense ratio = mgmt fee + fund expenses?
Indeed,

I know of some larger Hedge Funds that in addition to the management and performance fees, saddle partners with all manner of fixed expenses and even salaries for staff.

Generally, if the expense structure is not fully disclosed you can assume the worst.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: returnonmycapital on November 20, 2013, 07:14:52 AM
Started a fund in 2007 with own money. Now bumping up against $30m. Performance fee only.

Hi returnonmycapital,

Just curious. how's your track record? Where do u normally find your ideas (i.e gurufocus)?

15%/yr net (18%/yr gross). For ideas, I like all you folks the best. Otherwise: newspapers, industry studies, other investors, and sometimes just plain old luck. You know, all the regular stuff. I never listen to or read sell-side research. My wife is my retail analyst; she's friggin' sharp with money.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: longinvestor on November 20, 2013, 07:21:00 AM
With no disrespect to folks' managing OPM, the fee structure, I find that the title of this discussion thread tying Buffett's name with Pabrai (by extension, OPM managers)  and the ensuing discussion on fee structures to be amusing at best.

Buffett closed his partnership, what, over 50 years ago? Besides, I don't know if the partnership was only open to "accredited investors" (whatever that meant in the 50's) when it was open.

Last I checked, the Pabrai fund is open to folks with net worth over $5,000,000 and a minimum $2,500,000 investment. All you need today is $120 to invest in the Buffett fund called BRK-B and you don't pay a dime in fees to Berkshire. Of course, it comes with no guarantee on performance, or does it?

Title: Re: Pabrai/Buffett partnership fee structure
Post by: nkp007 on November 20, 2013, 07:24:46 AM
Started a fund in 2011 with $1 million. Currently at $7 million.

Startup costs (legal fees) were around $25k (amortized to the fund) and annual costs are approximately $15k.

At $1mm it was a bit tight, but really no big deal. At $7mm, the operational costs are unnoticeable.

I won't charge any fees until year 5. My investors put a lot of trust in me by writing my checks and giving me free reign. They essentially gave me a free education by allowing me to invest as I see fit when I had no track record so that's the least I can do in return. After year 5, will do 20% performance fee (no asset fee).

Most important part is to raise the right type of capital that won't flee when you need it the most. That involves rejecting potential investors.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: oddballstocks on November 20, 2013, 07:31:15 AM
thanks racemize. I think it comes to around 1-2 Mn AUM to break even (With several assumptions ofcourse). So to give up your day time job , I think we are talking of 5Mn AUM or higher if you have to support your family and feed them something beyond ramen :)
5M$ AUM is consistent with my own calculations for a full fund structure to break even after a reasonable salary/incentive for the investment manager.

The quotes I received for setting up a full fund structure in the BVI are similar - 20-30K$ initially, and around 15K$ annually. Needless to say with such costs you might have a few rough years in the beginning and I would advise to start with at least 300-500K$ AUM. However, 90% of success is showing up - so don't be discouraged.

Can you walk me through your numbers?

In terms of expenses this is what I see to hit a $100k salary.  I say $100k because that's a reasonable analyst salary, why take on all this risk with all the work if you are making 50-75% of what an analyst is making?

$100k salary
$20k health benefits (for a family, maybe $10k for an individual)
$15k SSN/Medicare
$15k ongoing fund expenses

$150k in fees to provide the same $100k income.  On a $5m fund that's a 3% expense ratio.

The issue I have is you can bend the numbers to make this work if you hit the hurdle, and if the fund is clearing the hurdle every year everything seems to work fine.  It's what happens in a lean year, or a 2008 when it might be 2-3 years before the hurdle is met again.

So say you have $5m and hit 2008 and lose 40%, you're down to $3m in AUM, and 1% on that is barely enough to cover ongoing expenses and health care, looks like it's food stamp time.

A lot of people have clearly done well managing money, it's great to make money with other people's money, and I congratulate all of those who have started small and persevered.  The route just seems tough, and everything looks great with ideal numbers.  Personally I would rather have the numbers work on the worst case scenario and in the best of times cut the management fee or rebate it to clients.  But I'd hate to set up a business that works if everything works in a perfect scenario, and in the worst case I'd be better off making minimum wage at McDonalds.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: returnonmycapital on November 20, 2013, 07:39:30 AM
Started a fund in 2011 with $1 million. Currently at $7 million.

Startup costs (legal fees) were around $25k (amortized to the fund) and annual costs are approximately $15k.

At $1mm it was a bit tight, but really no big deal. At $7mm, the operational costs are unnoticeable.

I won't charge any fees until year 5. My investors put a lot of trust in me by writing my checks and giving me free reign. They essentially gave me a free education by allowing me to invest as I see fit when I had no track record so that's the least I can do in return. After year 5, will do 20% performance fee (no asset fee).

Most important part is to raise the right type of capital that won't flee when you need it the most. That involves rejecting potential investors.

Communication is important. Like Fisher said, your menu will attract a certain customer. If it changes, your customer base will get confused and it will change. Your menu (your letters to investors) should be consistent. Imagine your perfect investor and write your letter to him/her. You'll get the customers you want and avoid those you don't want. I think that my letters actually rub some people the wrong way, but that is not a bad thing.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Kraven on November 20, 2013, 07:49:22 AM
Started a fund in 2011 with $1 million. Currently at $7 million.

Startup costs (legal fees) were around $25k (amortized to the fund) and annual costs are approximately $15k.

At $1mm it was a bit tight, but really no big deal. At $7mm, the operational costs are unnoticeable.

I won't charge any fees until year 5. My investors put a lot of trust in me by writing my checks and giving me free reign. They essentially gave me a free education by allowing me to invest as I see fit when I had no track record so that's the least I can do in return. After year 5, will do 20% performance fee (no asset fee).

Most important part is to raise the right type of capital that won't flee when you need it the most. That involves rejecting potential investors.

I am not sure I understand.  So you are making no money from your fund?  In 2016 you'll start making money ideally.  You are viewing this as getting the opportunity to build a track record?  I can see why you would do this and commend you for it, but seems as if there is a lot of risk involved.  Say you had started this not in 2011, but in 2007.  You would be making nothing and have walked into a shit storm.  There is a lot of risk involved in managing money that I think this thread has not adequately illustrated.  Lose money for clients and those good souls may not be so good.  That's when the lawsuits start to fly.  Hell hath no fury like an investor scorned.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: returnonmycapital on November 20, 2013, 07:51:59 AM
thanks racemize. I think it comes to around 1-2 Mn AUM to break even (With several assumptions ofcourse). So to give up your day time job , I think we are talking of 5Mn AUM or higher if you have to support your family and feed them something beyond ramen :)
5M$ AUM is consistent with my own calculations for a full fund structure to break even after a reasonable salary/incentive for the investment manager.

The quotes I received for setting up a full fund structure in the BVI are similar - 20-30K$ initially, and around 15K$ annually. Needless to say with such costs you might have a few rough years in the beginning and I would advise to start with at least 300-500K$ AUM. However, 90% of success is showing up - so don't be discouraged.

Can you walk me through your numbers?

In terms of expenses this is what I see to hit a $100k salary.  I say $100k because that's a reasonable analyst salary, why take on all this risk with all the work if you are making 50-75% of what an analyst is making?

$100k salary
$20k health benefits (for a family, maybe $10k for an individual)
$15k SSN/Medicare
$15k ongoing fund expenses

$150k in fees to provide the same $100k income.  On a $5m fund that's a 3% expense ratio.

The issue I have is you can bend the numbers to make this work if you hit the hurdle, and if the fund is clearing the hurdle every year everything seems to work fine.  It's what happens in a lean year, or a 2008 when it might be 2-3 years before the hurdle is met again.

So say you have $5m and hit 2008 and lose 40%, you're down to $3m in AUM, and 1% on that is barely enough to cover ongoing expenses and health care, looks like it's food stamp time.

A lot of people have clearly done well managing money, it's great to make money with other people's money, and I congratulate all of those who have started small and persevered.  The route just seems tough, and everything looks great with ideal numbers.  Personally I would rather have the numbers work on the worst case scenario and in the best of times cut the management fee or rebate it to clients.  But I'd hate to set up a business that works if everything works in a perfect scenario, and in the worst case I'd be better off making minimum wage at McDonalds.

I was talking to my fund's administrators last night. They said that the independent fund management business is just like any other: 80% fail within 5 years. I would imagine that those 20% that succeed studied the potential pitfalls closely. But more than that, they are probably people who, like Sam Walton said: "Get at it and stay at it." The future is unknown, it will always be so. There is only one time to start your dream and that is yesterday.

Mind you, 3 years of annual living expenses in savings will likely get you over the bumps. Also important to remember, without your spouse/life partner on board, you may end up single.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: nkp007 on November 20, 2013, 07:55:55 AM
Started a fund in 2011 with $1 million. Currently at $7 million.

Startup costs (legal fees) were around $25k (amortized to the fund) and annual costs are approximately $15k.

At $1mm it was a bit tight, but really no big deal. At $7mm, the operational costs are unnoticeable.

I won't charge any fees until year 5. My investors put a lot of trust in me by writing my checks and giving me free reign. They essentially gave me a free education by allowing me to invest as I see fit when I had no track record so that's the least I can do in return. After year 5, will do 20% performance fee (no asset fee).

Most important part is to raise the right type of capital that won't flee when you need it the most. That involves rejecting potential investors.

I am not sure I understand.  So you are making no money from your fund?  In 2016 you'll start making money ideally.  You are viewing this as getting the opportunity to build a track record?  I can see why you would do this and commend you for it, but seems as if there is a lot of risk involved.  Say you had started this not in 2011, but in 2007.  You would be making nothing and have walked into a shit storm.  There is a lot of risk involved in managing money that I think this thread has not adequately illustrated.  Lose money for clients and those good souls may not be so good.  That's when the lawsuits start to fly.  Hell hath no fury like an investor scorned.

I treat it like any new business; the first few years are rarely cash flowing. I gave myself five years and saved enough (and cut spending enough) to give myself the best possible chance to make this work. Luck will always play a role.

This business isn't guaranteed in any way. You need to love bathing in the seas of uncertainty.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: premfan on November 20, 2013, 08:05:10 AM
Started a fund in 2011 with $1 million. Currently at $7 million.

Startup costs (legal fees) were around $25k (amortized to the fund) and annual costs are approximately $15k.

At $1mm it was a bit tight, but really no big deal. At $7mm, the operational costs are unnoticeable.

I won't charge any fees until year 5. My investors put a lot of trust in me by writing my checks and giving me free reign. They essentially gave me a free education by allowing me to invest as I see fit when I had no track record so that's the least I can do in return. After year 5, will do 20% performance fee (no asset fee).

Most important part is to raise the right type of capital that won't flee when you need it the most. That involves rejecting potential investors.

I am not sure I understand.  So you are making no money from your fund?  In 2016 you'll start making money ideally.  You are viewing this as getting the opportunity to build a track record?  I can see why you would do this and commend you for it, but seems as if there is a lot of risk involved.  Say you had started this not in 2011, but in 2007.  You would be making nothing and have walked into a shit storm.  There is a lot of risk involved in managing money that I think this thread has not adequately illustrated.  Lose money for clients and those good souls may not be so good.  That's when the lawsuits start to fly.  Hell hath no fury like an investor scorned.

I treat it like any new business; the first few years are rarely cash flowing. I gave myself five years and saved enough (and cut spending enough) to give myself the best possible chance to make this work. Luck will always play a role.

This business isn't guaranteed in any way. You need to love bathing in the seas of uncertainty.

Most people don't have the opportunity to attract 7 million with no track record so I commend you on that. Are most of your investors friends and family? I'm asking this because if not you have some serious marketing skills!
Title: Re: Pabrai/Buffett partnership fee structure
Post by: oddballstocks on November 20, 2013, 08:12:12 AM
thanks racemize. I think it comes to around 1-2 Mn AUM to break even (With several assumptions ofcourse). So to give up your day time job , I think we are talking of 5Mn AUM or higher if you have to support your family and feed them something beyond ramen :)
5M$ AUM is consistent with my own calculations for a full fund structure to break even after a reasonable salary/incentive for the investment manager.

The quotes I received for setting up a full fund structure in the BVI are similar - 20-30K$ initially, and around 15K$ annually. Needless to say with such costs you might have a few rough years in the beginning and I would advise to start with at least 300-500K$ AUM. However, 90% of success is showing up - so don't be discouraged.

Can you walk me through your numbers?

In terms of expenses this is what I see to hit a $100k salary.  I say $100k because that's a reasonable analyst salary, why take on all this risk with all the work if you are making 50-75% of what an analyst is making?

$100k salary
$20k health benefits (for a family, maybe $10k for an individual)
$15k SSN/Medicare
$15k ongoing fund expenses

$150k in fees to provide the same $100k income.  On a $5m fund that's a 3% expense ratio.

The issue I have is you can bend the numbers to make this work if you hit the hurdle, and if the fund is clearing the hurdle every year everything seems to work fine.  It's what happens in a lean year, or a 2008 when it might be 2-3 years before the hurdle is met again.

So say you have $5m and hit 2008 and lose 40%, you're down to $3m in AUM, and 1% on that is barely enough to cover ongoing expenses and health care, looks like it's food stamp time.

A lot of people have clearly done well managing money, it's great to make money with other people's money, and I congratulate all of those who have started small and persevered.  The route just seems tough, and everything looks great with ideal numbers.  Personally I would rather have the numbers work on the worst case scenario and in the best of times cut the management fee or rebate it to clients.  But I'd hate to set up a business that works if everything works in a perfect scenario, and in the worst case I'd be better off making minimum wage at McDonalds.

I was talking to my fund's administrators last night. They said that the independent fund management business is just like any other: 80% fail within 5 years. I would imagine that those 20% that succeed studied the potential pitfalls closely. But more than that, they are probably people who, like Sam Walton said: "Get at it and stay at it." The future is unknown, it will always be so. There is only one time to start your dream and that is yesterday.

Mind you, 3 years of annual living expenses in savings will likely get you over the bumps. Also important to remember, without your spouse/life partner on board, you may end up single.

I agree with you, fundamentally investment management is just another type of business, although few investors view or treat it as a business.  The same care taken when considering opening a coffee shop needs to be taken when considering opening an investment management business.

You're absolutely correct that any business faces uncertainty, but it's prudent to plan for uncertainty, in your case you saved three years worth of expenses.

I have long considered managing investments, it seems like a nice business, but after cycling through all of these things I decided I'd rather own a traditional business.  We have a product we sell to customers (finance related), the value of the product doesn't reside in the ups and downs of the market.  My upside is possibly more limited, but so is my downside.  I have an alternate upside which is if I can grow the business and decide I want to leave I can.  Investors are investing with a manager, if the manager leaves capital does too, unless one builds a giant team to run the fund with them it's hard to sell a small investment management practice, whereas selling a small business isn't very difficult.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Kraven on November 20, 2013, 08:16:11 AM
Started a fund in 2011 with $1 million. Currently at $7 million.

Startup costs (legal fees) were around $25k (amortized to the fund) and annual costs are approximately $15k.

At $1mm it was a bit tight, but really no big deal. At $7mm, the operational costs are unnoticeable.

I won't charge any fees until year 5. My investors put a lot of trust in me by writing my checks and giving me free reign. They essentially gave me a free education by allowing me to invest as I see fit when I had no track record so that's the least I can do in return. After year 5, will do 20% performance fee (no asset fee).

Most important part is to raise the right type of capital that won't flee when you need it the most. That involves rejecting potential investors.

I am not sure I understand.  So you are making no money from your fund?  In 2016 you'll start making money ideally.  You are viewing this as getting the opportunity to build a track record?  I can see why you would do this and commend you for it, but seems as if there is a lot of risk involved.  Say you had started this not in 2011, but in 2007.  You would be making nothing and have walked into a shit storm.  There is a lot of risk involved in managing money that I think this thread has not adequately illustrated.  Lose money for clients and those good souls may not be so good.  That's when the lawsuits start to fly.  Hell hath no fury like an investor scorned.

I treat it like any new business; the first few years are rarely cash flowing. I gave myself five years and saved enough (and cut spending enough) to give myself the best possible chance to make this work. Luck will always play a role.

This business isn't guaranteed in any way. You need to love bathing in the seas of uncertainty.

Fair enough.  Takes a lot of guts to know you're going to go 5 years before making a dime. 
Title: Re: Pabrai/Buffett partnership fee structure
Post by: nkp007 on November 20, 2013, 08:18:13 AM
It's all family and friends, people I know well and barraged with various investor quotes over the years. Over time, they bought in to the philosophy.

I was lucky in that I had certain tools at my disposal (people close to me with cash balances, ample time to read and learn- started reading about investing in 2008 right out of college, and a huge tolerance for pain).

Luck played a huge role.  Be aware of what tools are available to you and leverage them.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: oddballstocks on November 20, 2013, 08:52:08 AM

Most people don't have the opportunity to attract 7 million with no track record so I commend you on that. Are most of your investors friends and family? I'm asking this because if not you have some serious marketing skills!

This raises another interesting point that I'm sure I'll be lambasted for... I would argue that actual investment acumen doesn't matter, it's marketing and sales skills that matter.

You have ETF's raising billions of dollars and guaranteeing that people will not outperform.  Hot money does flow to managers with great records, but not if people don't know about them. 

If you look at opening a fund management business as a business you need to serve two things, serve your clients and make a profit.  You maximize your profit by accumulating assets, you serve your clients by not losing them money.  If you have the greatest track record in the world then have three years of 30% losses you will have no clients.  If you have an absolutely average track record but haven't lost client money you will be able to sell the heck out of your fund and gather assets.

There are brokers who I know who've raised 10s and 100s of millions of assets and investing them in average value funds.  They all tell me the same thing, clients don't care about performance, they care about the story, and not losing money. 

I feel there's a giant disconnect at times on this board, and in this thread.  There's this ideal that if you establish a great track record you will attract assets and be successful.  If you establish a great record you will be looked up to by other investors, but it doesn't guarantee assets.  I would argue that sales technique regardless of track record is much more important.  If people are able to gather assets with terrible track records why are those with great records having trouble attracting assets?  I think it's sales and marketing.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Edward on November 20, 2013, 08:57:12 AM
Can you walk me through your numbers?

In terms of expenses this is what I see to hit a $100k salary.  I say $100k because that's a reasonable analyst salary, why take on all this risk with all the work if you are making 50-75% of what an analyst is making?

$100k salary
$20k health benefits (for a family, maybe $10k for an individual)
$15k SSN/Medicare
$15k ongoing fund expenses

$150k in fees to provide the same $100k income.  On a $5m fund that's a 3% expense ratio.

The issue I have is you can bend the numbers to make this work if you hit the hurdle, and if the fund is clearing the hurdle every year everything seems to work fine.  It's what happens in a lean year, or a 2008 when it might be 2-3 years before the hurdle is met again.

So say you have $5m and hit 2008 and lose 40%, you're down to $3m in AUM, and 1% on that is barely enough to cover ongoing expenses and health care, looks like it's food stamp time.

A lot of people have clearly done well managing money, it's great to make money with other people's money, and I congratulate all of those who have started small and persevered.  The route just seems tough, and everything looks great with ideal numbers.  Personally I would rather have the numbers work on the worst case scenario and in the best of times cut the management fee or rebate it to clients.  But I'd hate to set up a business that works if everything works in a perfect scenario, and in the worst case I'd be better off making minimum wage at McDonalds.
I agree with your reasoning, but I have a different view on the numbers.

With 5M$ AUM, I would be making 25K$ annually as a base from the 0.5% management fee, plus the performance fee (10%). Say for argument's sake that NAV per share increases 10% annually (not a very good result but anyway), that's another 50K$ annually on average.

Now 75K$ doesn't look like much in the US, but it's plenty enough in my country (even the 25K$ base is OK).

Also consider that some expenses drop drastically and life improves in general when you don't have to drive to work every day. You save 1-2 hours a day commuting (that's huge), you don't have to pay higher rent to live near work, and you can raise your kids personally instead of paying for daycare and meeting them for the "first time" at age 14 because daddy is too busy working. I consider these very important advantages to being self employed in this manner.

Hence I'm quite happy with my setup.

This raises another interesting point that I'm sure I'll be lambasted for... I would argue that actual investment acumen doesn't matter, it's marketing and sales skills that matter.
I have the same experience. Most investors have no idea what they want or how to assess a track record, integrity, etc. Give them some buzz words and a nice hassle free offer, and it's in the bag.

However I would argue that in order to succeed professionally (as opposed to financially), one has to be patient and selective when dealing with investors. There is absolutely no need to go for 100M$+ AUM in 5 years in order to be successful as a professional. Of course, the quick buck requires a salesman :)


I feel there's a giant disconnect at times on this board, and in this thread.  There's this ideal that if you establish a great track record you will attract assets and be successful.  If you establish a great record you will be looked up to by other investors, but it doesn't guarantee assets.  I would argue that sales technique regardless of track record is much more important.  If people are able to gather assets with terrible track records why are those with great records having trouble attracting assets?  I think it's sales and marketing.
Again, it depends on what you're trying to achieve primarily - financial success or professional success. Getting both requires a great deal of patience, good partners, and some hard thinking.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Tim Eriksen on November 20, 2013, 09:28:59 AM
With no disrespect to folks' managing OPM, the fee structure, I find that the title of this discussion thread tying Buffett's name with Pabrai (by extension, OPM managers)  and the ensuing discussion on fee structures to be amusing at best.

Buffett closed his partnership, what, over 50 years ago? Besides, I don't know if the partnership was only open to "accredited investors" (whatever that meant in the 50's) when it was open.

Last I checked, the Pabrai fund is open to folks with net worth over $5,000,000 and a minimum $2,500,000 investment. All you need today is $120 to invest in the Buffett fund called BRK-B and you don't pay a dime in fees to Berkshire. Of course, it comes with no guarantee on performance, or does it?

The discussion is about the fee structure and its strengths and weaknesses. I am not sure why that is amusing.  I do have a question for you. 
Do you want your $120 managed like it is $120 billion?  If you do, then BRK is the way to go.  Over time high single digit returns is what he says to expect, and it is what you would have got over the last decade.  The huge sum he manages is quite an impediment to decent returns.  I am sure you have heard all the quotes by Buffett acknowledging it.   If someone investing in equities can't outperform BRK I would argue they should not be managing other people's money.   
Title: Re: Pabrai/Buffett partnership fee structure
Post by: watsa_is_a_randian_hero on November 20, 2013, 09:49:50 AM
Watsa,

That's interesting - I always thought the mgmt fee was to cover audit, admin, legal, custodial etc...? I know hedge funds do not report an "expense ratio" like mutual funds do, but are all of these expenses taken into account in the "expense ratio"? i.e. expense ratio = mgmt fee + fund expenses?

Think about it this way; a hedge fund legally is structured as an LP or a LLC usually.  It is a business.  The business has management expenses (fees paid to management company), as well as other fees, such as its own audit, or its own legal expenses, etc.  These are not expenses that benefit the management company; they are expenses directly related to the business of the fund, and for the benefit of the fund.

I have not seen an "expense ratio" for a hedge fund advertised in the same sense as a mutual fund; but for a mutual fund your equation above would be correct. 

A quick google search yielded the annual report for the vanguard 500 index fund...the annual report is just like the annual report of a company; it has an income statement.  Revenue consists of investment income; Expenses consist of (1) fees to vanguard for management, admin, marketing, and distribution and (2) fund expenses such as custodian fees, auditing fees, shareholder reporting fees, trustee fees, etc.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: oddballstocks on November 20, 2013, 10:14:39 AM
Can you walk me through your numbers?

In terms of expenses this is what I see to hit a $100k salary.  I say $100k because that's a reasonable analyst salary, why take on all this risk with all the work if you are making 50-75% of what an analyst is making?

$100k salary
$20k health benefits (for a family, maybe $10k for an individual)
$15k SSN/Medicare
$15k ongoing fund expenses

$150k in fees to provide the same $100k income.  On a $5m fund that's a 3% expense ratio.

The issue I have is you can bend the numbers to make this work if you hit the hurdle, and if the fund is clearing the hurdle every year everything seems to work fine.  It's what happens in a lean year, or a 2008 when it might be 2-3 years before the hurdle is met again.

So say you have $5m and hit 2008 and lose 40%, you're down to $3m in AUM, and 1% on that is barely enough to cover ongoing expenses and health care, looks like it's food stamp time.

A lot of people have clearly done well managing money, it's great to make money with other people's money, and I congratulate all of those who have started small and persevered.  The route just seems tough, and everything looks great with ideal numbers.  Personally I would rather have the numbers work on the worst case scenario and in the best of times cut the management fee or rebate it to clients.  But I'd hate to set up a business that works if everything works in a perfect scenario, and in the worst case I'd be better off making minimum wage at McDonalds.
I agree with your reasoning, but I have a different view on the numbers.

With 5M$ AUM, I would be making 25K$ annually as a base from the 0.5% management fee, plus the performance fee (10%). Say for argument's sake that NAV per share increases 10% annually (not a very good result but anyway), that's another 50K$ annually on average.

Now 75K$ doesn't look like much in the US, but it's plenty enough in my country (even the 25K$ base is OK).

Also consider that some expenses drop drastically and life improves in general when you don't have to drive to work every day. You save 1-2 hours a day commuting (that's huge), you don't have to pay higher rent to live near work, and you can raise your kids personally instead of paying for daycare and meeting them for the "first time" at age 14 because daddy is too busy working. I consider these very important advantages to being self employed in this manner.

Hence I'm quite happy with my setup.

This raises another interesting point that I'm sure I'll be lambasted for... I would argue that actual investment acumen doesn't matter, it's marketing and sales skills that matter.
I have the same experience. Most investors have no idea what they want or how to assess a track record, integrity, etc. Give them some buzz words and a nice hassle free offer, and it's in the bag.

However I would argue that in order to succeed professionally (as opposed to financially), one has to be patient and selective when dealing with investors. There is absolutely no need to go for 100M$+ AUM in 5 years in order to be successful as a professional. Of course, the quick buck requires a salesman :)


I feel there's a giant disconnect at times on this board, and in this thread.  There's this ideal that if you establish a great track record you will attract assets and be successful.  If you establish a great record you will be looked up to by other investors, but it doesn't guarantee assets.  I would argue that sales technique regardless of track record is much more important.  If people are able to gather assets with terrible track records why are those with great records having trouble attracting assets?  I think it's sales and marketing.
Again, it depends on what you're trying to achieve primarily - financial success or professional success. Getting both requires a great deal of patience, good partners, and some hard thinking.

For wherever you're at you have a good setup, in the US $25k is right around the threshold for poverty.  Someone earning that in the US could work at Costco, have less stress and make more.

You do have good arguments about working for yourself, but I could counter I work for a company and have all the same benefits.  I work from home, see my kids often, no commute, and I make a nice salary with zero market risk, almost zero risk in general.

I would say professional and financial success are closely linked.  The starving artist who paints pictures that sell for millions after their death doesn't consider themselves a professional success.

I would also contest the view of sales you paint.  Selling isn't all guys with slicked back hair and sport coats with elbow pads.  Selling is the process of helping a potential client find a solution to a problem they're having.  For an investor their problem is they can't manage their own money, you are providing that solution.  Nothing to feel bad about, no gimmicky stuff, no showy things either.  You aren't out selling raffle tickets here.  There is no shame in being promotional, marketing and selling.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Palantir on November 20, 2013, 10:20:25 AM
I agree with oddball, why are financial success and professional success mutually exclusive? It seems that many seem to look down on "sales", but I think that is the core of building a business, not being a mythical "capital allocator".
Title: Re: Pabrai/Buffett partnership fee structure
Post by: longinvestor on November 20, 2013, 10:29:58 AM
With no disrespect to folks' managing OPM, the fee structure, I find that the title of this discussion thread tying Buffett's name with Pabrai (by extension, OPM managers)  and the ensuing discussion on fee structures to be amusing at best.

Buffett closed his partnership, what, over 50 years ago? Besides, I don't know if the partnership was only open to "accredited investors" (whatever that meant in the 50's) when it was open.

Last I checked, the Pabrai fund is open to folks with net worth over $5,000,000 and a minimum $2,500,000 investment. All you need today is $120 to invest in the Buffett fund called BRK-B and you don't pay a dime in fees to Berkshire. Of course, it comes with no guarantee on performance, or does it?

The discussion is about the fee structure and its strengths and weaknesses. I am not sure why that is amusing.  I do have a question for you. 
Do you want your $120 managed like it is $120 billion?  If you do, then BRK is the way to go.  Over time high single digit returns is what he says to expect, and it is what you would have got over the last decade.  The huge sum he manages is quite an impediment to decent returns.    If someone investing in equities can't outperform BRK I would argue they should not be managing other people's money.   

Do I want my $120 managed like it is $120B? Absolutely why I've invested in BRK. Treating every individual investor the same as himself is how things are run at BRK.

Over time high single digit returns is what he says to expect I am sure you have heard all the quotes by Buffett acknowledging it. I've heard him preparing BRK investors to not expect the 20% returns of the past. If you have the quote where he pins it down to "high single digit returns", please share. Besides, if 9% is the actual return over the next 15-20 years, I'm very good with that. The choice for me is BRK or the S&P index. I don't pay fees. Not to mutual funds, not to advisors, not to anyone. I've had over 15 years of mediocre results after paying fees that lead me to this conclusion and to BRK.

If someone investing in equities can't outperform BRK I would argue they should not be managing other people's money. Agree wholeheartedly. Only issue is for the investees, they get to find that out after 5 or 10 years or longer and lots of fees that this is how it turned out. While on the subject of fees, I'd like to point out that Warren has also been cautioning ordinary investors (the Gotrock family story in the AR a few years ago) against paying fees. There is also the bet he has going on with the ror of the fund of hedge funds vs the index. Time will tell and I suspect Buffett will be correct.

The Buffett partnership of today is free. Pabrai's is not. Not everyone can invest in Pabrai's fund (or something like that). That's my point about the title, seen from the perspective of an investee.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Edward on November 20, 2013, 10:49:04 AM
For wherever you're at you have a good setup, in the US $25k is right around the threshold for poverty.  Someone earning that in the US could work at Costco, have less stress and make more.
I live in Israel.

I could work in a regular day job earning about the same, but the reason I'm not doing it are:

1. I love what I do (which is the most important reason). It's also strangely less stressful than most jobs around here.

2. I have a lot more flexibility in my schedule and more free time.

3. I can easily increase my earnings over time, because it doesn't take twice the work to manage twice the money. It's hard to convince your boss that you deserve twice as much for the same job.

I feel that there are definitely ways to be worse off in my situation :) Also results have been good so far overall.

You do have good arguments about working for yourself, but I could counter I work for a company and have all the same benefits.  I work from home, see my kids often, no commute, and I make a nice salary with zero market risk, almost zero risk in general.
Well, congrats!  8)

I would say professional and financial success are closely linked.  The starving artist who paints pictures that sell for millions after their death doesn't consider themselves a professional success.

I would also contest the view of sales you paint.  Selling isn't all guys with slicked back hair and sport coats with elbow pads.  Selling is the process of helping a potential client find a solution to a problem they're having.  For an investor their problem is they can't manage their own money, you are providing that solution.  Nothing to feel bad about, no gimmicky stuff, no showy things either.  You aren't out selling raffle tickets here.  There is no shame in being promotional, marketing and selling.
Agreed, they are linked. If you have something good to offer, it's important that people know it's there.

I am just more inclined to the professional side of things and less motivated in the marketing department. Lucky for me that I now have a wonderful business partner that has had 20 years of experience as a CEO of her own company, and she knows how to sell.

I think that in this business, finding great business partners and investors is as important as the actual portfolio management.

 
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Parsad on November 20, 2013, 11:39:30 AM

Most people don't have the opportunity to attract 7 million with no track record so I commend you on that. Are most of your investors friends and family? I'm asking this because if not you have some serious marketing skills!

This raises another interesting point that I'm sure I'll be lambasted for... I would argue that actual investment acumen doesn't matter, it's marketing and sales skills that matter.

You have ETF's raising billions of dollars and guaranteeing that people will not outperform.  Hot money does flow to managers with great records, but not if people don't know about them. 

If you look at opening a fund management business as a business you need to serve two things, serve your clients and make a profit.  You maximize your profit by accumulating assets, you serve your clients by not losing them money.  If you have the greatest track record in the world then have three years of 30% losses you will have no clients.  If you have an absolutely average track record but haven't lost client money you will be able to sell the heck out of your fund and gather assets.

There are brokers who I know who've raised 10s and 100s of millions of assets and investing them in average value funds.  They all tell me the same thing, clients don't care about performance, they care about the story, and not losing money. 

I feel there's a giant disconnect at times on this board, and in this thread.  There's this ideal that if you establish a great track record you will attract assets and be successful.  If you establish a great record you will be looked up to by other investors, but it doesn't guarantee assets.  I would argue that sales technique regardless of track record is much more important.  If people are able to gather assets with terrible track records why are those with great records having trouble attracting assets?  I think it's sales and marketing.

It's both Oddball...performance and marketing.  But marketing can sure hide a lot of underperformance, as you can see it through the industry!  Whereas if you underperform, and are not good at marketing, then you may be done.  Cheers!
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Tim Eriksen on November 20, 2013, 11:59:13 AM
With no disrespect to folks' managing OPM, the fee structure, I find that the title of this discussion thread tying Buffett's name with Pabrai (by extension, OPM managers)  and the ensuing discussion on fee structures to be amusing at best.

Buffett closed his partnership, what, over 50 years ago? Besides, I don't know if the partnership was only open to "accredited investors" (whatever that meant in the 50's) when it was open.

Last I checked, the Pabrai fund is open to folks with net worth over $5,000,000 and a minimum $2,500,000 investment. All you need today is $120 to invest in the Buffett fund called BRK-B and you don't pay a dime in fees to Berkshire. Of course, it comes with no guarantee on performance, or does it?

The discussion is about the fee structure and its strengths and weaknesses. I am not sure why that is amusing.  I do have a question for you. 
Do you want your $120 managed like it is $120 billion?  If you do, then BRK is the way to go.  Over time high single digit returns is what he says to expect, and it is what you would have got over the last decade.  The huge sum he manages is quite an impediment to decent returns.    If someone investing in equities can't outperform BRK I would argue they should not be managing other people's money.   

Do I want my $120 managed like it is $120B? Absolutely why I've invested in BRK. Treating every individual investor the same as himself is how things are run at BRK.

Over time high single digit returns is what he says to expect I am sure you have heard all the quotes by Buffett acknowledging it. I've heard him preparing BRK investors to not expect the 20% returns of the past. If you have the quote where he pins it down to "high single digit returns", please share. Besides, if 9% is the actual return over the next 15-20 years, I'm very good with that. The choice for me is BRK or the S&P index. I don't pay fees. Not to mutual funds, not to advisors, not to anyone. I've had over 15 years of mediocre results after paying fees that lead me to this conclusion and to BRK.

If someone investing in equities can't outperform BRK I would argue they should not be managing other people's money. Agree wholeheartedly. Only issue is for the investees, they get to find that out after 5 or 10 years or longer and lots of fees that this is how it turned out. While on the subject of fees, I'd like to point out that Warren has also been cautioning ordinary investors (the Gotrock family story in the AR a few years ago) against paying fees. There is also the bet he has going on with the ror of the fund of hedge funds vs the index. Time will tell and I suspect Buffett will be correct.

The Buffett partnership of today is free. Pabrai's is not. Not everyone can invest in Pabrai's fund (or something like that). That's my point about the title, seen from the perspective of an investee.

Thank you for clarifying that you were looking at it form an investee perspective.  The discussion was clearly from the manager perspective. 

Regarding BRK.  What makes sense for you is not necessarily true for others.  Many on this board (including those managing OPM) have done significantly better than BRK over the last 5 or 10 years, not because they are smarter than Buffett, but because they are not handicapped by managing such a large sum.   A 15 to 20% return compounded over time is substantially greater than 8 to 10%.   

Buffett was quite clear at the 2008 meeting, and I am fairly certain subsequently, that he would be very happy with 10% pre-tax returns on the investment portfolio: "We would be very happy if we earned 10%, pre-tax" on the additions to Berkshire's equity portfolio, said Buffett. "Anyone that expects us to come close to replicating the past should sell their stock; it isn't going to happen. We'll get decent results over time, but not indecent results."

Buffett's actions show that he believes in active management.  He hired Weschler and Combs over indexing.  Why?  He is paying them modest hedge fund like fees to manage part of the portfolio. Thus you actually are paying fees in BRK for the managers to invest the portfolio and someday when Buffett is gone you will pay even more. 
Title: Re: Pabrai/Buffett partnership fee structure
Post by: merkhet on November 20, 2013, 12:15:17 PM
I'm glad we have this thread because a lot of these questions have been brewing inside my head as well. So thanks for the contributors here.

For those of you who have amassed a pretty significant chunk of assets, what is the origin of your asset base? Is it friends and family squared? (Friends and family of friends and family) Was there significant marketing involved?

At $3M+ of AUM, my asset base is almost exclusively friends and family. I had a PM discussion with another forum participant about whether it was realistic to believe that performance would eventually do most of the marketing work for you... Anyone have further thoughts on that?
Title: Re: Pabrai/Buffett partnership fee structure
Post by: oddballstocks on November 20, 2013, 12:22:43 PM
I'm glad we have this thread because a lot of these questions have been brewing inside my head as well. So thanks for the contributors here.

For those of you who have amassed a pretty significant chunk of assets, what is the origin of your asset base? Is it friends and family squared? (Friends and family of friends and family) Was there significant marketing involved?

At $3M+ of AUM, my asset base is almost exclusively friends and family. I had a PM discussion with another forum participant about whether it was realistic to believe that performance would eventually do most of the marketing work for you... Anyone have further thoughts on that?

No it will not, no one will know your story unless you tell them.  Why is your fund different, not why better?  There will always be the best performing fund, you need to move away from absolute performance and discuss what differentiates you from the pack.  You have returns as a result of <something>.  Here's the other thing, moving away from returns helps keep investors, maybe you're invested in owner operators, you believe over time they outperform, so investors have a reason to invest, but it won't happen every year.  You want investors to buy into your story, your philosophy, so when you have down years, and you will they'll stick with you.  They're still invested in the story, not the returns.

Just my $.02.  If you're marketing returns and returns alone don't be surprised when investors run for the door when returns disappoint.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Parsad on November 20, 2013, 12:23:45 PM
I'm glad we have this thread because a lot of these questions have been brewing inside my head as well. So thanks for the contributors here.

For those of you who have amassed a pretty significant chunk of assets, what is the origin of your asset base? Is it friends and family squared? (Friends and family of friends and family) Was there significant marketing involved?

At $3M+ of AUM, my asset base is almost exclusively friends and family. I had a PM discussion with another forum participant about whether it was realistic to believe that performance would eventually do most of the marketing work for you... Anyone have further thoughts on that?

No friends and family other than a couple in the Canadian Fund.  Almost all of our partners came through referrals.  I've found that many friends and family tend to treat the fund as a personal piggy bank..."Oh, I need money to start a new business", "Oh, I'm going to buy a new car", "Oh, I'm thinking of buying another investment property", etc.  Once we cut back on the friends and family, we found the fund grew much better. 

All of our partners are individuals, families, family trusts or personal corporations.  No fund of funds, no endowments, etc.  We are also terrible at marketing, thus the small size of our funds.  Fortunately, I don't have to live off the incentive fees in our funds, so I can do this forever.  Instead, they get reinvested back into the funds and our investment gets bigger.  I think I'm going to be like Francis...grow slowly for 20 years and just blow up to $1.2B after!   ;D  Cheers!
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Edward on November 20, 2013, 12:27:39 PM
Put it in another way - if the index earns 8%, the hedge fund has to earn 11.5 - 12% just to break even for the investor after costs, fees and taxes. Berkshire is better than the index as it doesn't pay dividends ( less taxes ) and doesn't have the index overhead. ( 0.18% or 0.1% )

cheers!
I think this is a real smart way to invest for a passive investor that can't be sure that he is buying the "right" hedge fund. I think only a few % outperform the indices over time so why take the risk really.

But if you can find some fund manager with "the right stuff"(whatever that is) that can work amazingly well. It makes sense to invest in Berkshire, while searching for a suitable money manager.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Tim Eriksen on November 20, 2013, 12:28:03 PM
Regarding BRK.  What makes sense for you is not necessarily true for others.  Many on this board (including those managing OPM) have done significantly better than BRK over the last 5 or 10 years, not because they are smarter than Buffett, but because they are not handicapped by managing such a large sum.   A 15 to 20% return compounded over time is substantially greater than 8 to 10%. 

While the underlying premise above is true, I would say that most retail investors that invest with hedge funds will trail the index ( and berkshire) after paying for costs, fees and short-term/long-term taxes. Personal portfolio is a different story as the investor has control over when to sell and what to buy.

Put it in another way - if the index earns 8%, the hedge fund has to earn 11.5 - 12% just to break even for the investor after costs, fees and taxes. Berkshire is better than the index as it doesn't pay dividends ( less taxes ) and doesn't have the index overhead. ( 0.18% or 0.1% )

cheers!

If most retail investors who invest in hedge funds lag the index it is due to making the same mistakes those investors make in investing in common stocks or mutual funds.  They assume bigger is better and don't rationally evaluate if the future will be like the past.  For an individual to outperform the market he/she has to find value (i.e. an undiscovered stock).  To outperform in a mutual or hedge fund, I would argue you have to find a manager who follows that strategy.  Which likely means he or she is an undiscovered manager managing less than $200 million as well because it is near impossible to substantially outperform with a high level of assets.  That is basically what Buffett's bet was about.  There is no way he would take that bet against smaller managers.     
     
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Edward on November 20, 2013, 12:39:33 PM
For those of you who have amassed a pretty significant chunk of assets, what is the origin of your asset base? Is it friends and family squared? (Friends and family of friends and family) Was there significant marketing involved?
Started with family, moved on to friends and acquaintances, some referrals. I like to get to know shareholders before they become shareholders.

You want investors to buy into your story, your philosophy, so when you have down years, and you will they'll stick with you.  They're still invested in the story, not the returns.
It's very important that investors develop a "story" around you the same way it works for stocks. Generally, if you understand what a company is about you'll have much easier time sticking around in a crash, maybe adding more!

For the last 5 years I have been managing a nice forum where we discuss ideas, very similar to this one but in Hebrew: http://long.co.il/index.php/forum/index

That helped a bit. I think setting up a forum, blog or some other place where you can showcase your way of thinking will do wonders for your "brand recognition" over time.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: skanjete on November 20, 2013, 12:53:56 PM
My experience is that marketing in this type of job is less important.
If you have a decent track record and you have a reputation of integrity and honesty, the money comes automatically. Money tends to attract more money.

I honestly never marketed our partnership, but over the years, people came asking by themselves if they could join. Psycologically that's very important, because that way, they don't feel like they were being sold anything. They were the asking party and were convinced of the investment strategy beforehand.

I also select people so they mentally fit in in our partnership. 3 years ago I had someone interested and his investment could have grown my AUM with 50%. However I turned him down because he told me he couldn't stand volatility. I knew I couldn't guarantee him this, thus it made no sense to start pretending. A partnership on such a pretext would never have worked, and although it was tempting, I wouldn't have done myself or my partners a favor by letting him in.

Of course, you grow somewhat slower this way, but the money that comes in, tends to stay. This allows me to truly invest and think on a long term basis. Over the last 10 years I only had 3 partial redemptions for a total of 0,4% of current assets, although partners can exit every quarter. In 2008, I had no redemptions at all. On the contrary, the existing partners invested an extra 30% although (or because) 2008 was terrible.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Edward on November 20, 2013, 01:06:10 PM
My experience is that marketing in this type of job is less important.
If you have a decent track record and you have a reputation of integrity and honesty, the money comes automatically. Money tends to attract more money.

I honestly never marketed our partnership, but over the years, people came asking by themselves if they could join. Psychologically that's very important, because that way, they don't feel like they were being sold anything. They were the asking party and were convinced of the investment strategy beforehand.
This is the exact same way we do it. Many people are actively looking for places to invest and they tend to ask around.

However I would like to stress that it works best when you spread a big "net" of acquaintances and referrals, so people can reach you. Call it "passive marketing".
Title: Re: Pabrai/Buffett partnership fee structure
Post by: longinvestor on November 20, 2013, 01:10:39 PM
Regarding BRK.  What makes sense for you is not necessarily true for others.  Many on this board (including those managing OPM) have done significantly better than BRK over the last 5 or 10 years, not because they are smarter than Buffett, but because they are not handicapped by managing such a large sum.   A 15 to 20% return compounded over time is substantially greater than 8 to 10%. 

While the underlying premise above is true, I would say that most retail investors that invest with hedge funds will trail the index ( and berkshire) after paying for costs, fees and short-term/long-term taxes. Personal portfolio is a different story as the investor has control over when to sell and what to buy.

Put it in another way - if the index earns 8%, the hedge fund has to earn 11.5 - 12% just to break even for the investor after costs, fees and taxes. Berkshire is better than the index as it doesn't pay dividends ( less taxes ) and doesn't have the index overhead. ( 0.18% or 0.1% )

cheers!

If most retail investors who invest in hedge funds lag the index it is due to making the same mistakes those investors make in investing in common stocks or mutual funds.  They assume bigger is better and don't rationally evaluate if the future will be like the past.  For an individual to outperform the market he/she has to find value (i.e. an undiscovered stock).  To outperform in a mutual or hedge fund, I would argue you have to find a manager who follows that strategy.  Which likely means he or she is an undiscovered manager managing less than $200 million as well because it is near impossible to substantially outperform with a high level of assets.  That is basically what Buffett's bet was about.  There is no way he would take that bet against smaller managers.     
     

Which likely means he or she is an undiscovered manager managing less than $200 million as well because it is near impossible to substantially outperform with a high level of assets.  That is basically what Buffett's bet was about.  I beg to disagree, that was not the bet Warren made. His bet was that the hedge funds' 2 & 20 fee structure would guarantee mediocre results over the long term. He has been very vocal about this, even in this year's annual meeting.

There is no way he would take that bet against smaller managers.    Agree he would not. Of course size is an impediment. "Berkshire has gotten too big" is urban myth. Where people are missing the point of the BRK of today / tomorrow is that, in a sense, there are many "small managers" within Berkshire today. Starting with Todd & Ted, the insurance heads either growing the float at low CR or the operating unit heads making capital investments, tuck-in acquisitions etc. The need to find "elephants" is diminishing all the time and will be "occasional", Warren calls this out in this years annual report.

A 15 to 20% return compounded over time is substantially greater than 8 to 10% I prefer the relatively high probability of 8-10% over the certain fee structure that comes attached with just a promise of 15-20%
Title: Re: Pabrai/Buffett partnership fee structure
Post by: APG12 on November 20, 2013, 01:53:33 PM
Agree he would not. Of course size is an impediment. "Berkshire has gotten too big" is urban myth.

Buffett said at his annual meeting that the 7.9% growth rate over the past 5 years was partially a result of Berkshire's size. So is this a myth disseminated by Buffett himself? Are you just arguing to argue now??
Title: Re: Pabrai/Buffett partnership fee structure
Post by: benhacker on November 20, 2013, 02:33:07 PM
Regarding questions about how those of us who started small have grown.  My AUM / client history is below (formed business in late '06) which I think is typical of a small RIA with only minimal / medium connections to wealth who lives far off the Street:

YE '07 - $0.31m / 11
YE '08 - $0.31m / 15
YE '09 - $1.06m / 19
YE '10 - $2.42m / 30
YE '11 - $3.25m / 34
YE '12 - $3.82m / 39

Probably will close out this year with $6-6.5m and 50+ clients.

For what it's worth, I think there are many ways to success, and they mostly depend on what you want / define as success.

I started at the urging of some friends, who persisted to harass me for several years after college.  They suggested to me my business model based on my concerns, which at the time were:

1) I liked investing, I don't like dealing with clients / running a business (I wouldn't describe myself as entrepreneurial)
2) I had a full time job, and I hated the idea of marketing financial services to get a size which would sustain itself

My friends just said to manage the assets of clients the same as my own, no exceptions, and just tell clients to take it or leave it.  They told me to setup shop with the expectation that clients wouldn't talk to me, and keep it that way.  Seemed reasonable to me, so that's what I did.

For those who think this is so hard, I can only say that "yes" it take a long time commitment... but I think it's simple (maybe not easy).  I would say that if you are managing your own money *and* you strongly believe you are exceptional at managing assets, I think the stretch to managing money isn't a big one.  So what if you don't make money for 5-7 years... what does that matter?  If you want a "job" that can generate high income immediately, well then I agree it sucks, but how many people really are doing this for that reason (maybe a lot, but I doubt it)? 

This is a job you can do on the side (obviously not ideal, but if you are managing your own money you likely are already doing that right?).  Also, as with almost any business, the value (NPV) of the business lies deeply out in the future cash flows, and I think if you think of this as creating a business (not really my focus, but it's certainly an aspect of what I do this) you have to think the same way.  Assuming you can do 2-3% above market after fees for 10 years (not 5) I can *guarantee* you that unless you are trying to hide, you will be found whether you doing any marketing at all.

For me, I have always done no marketing, just word of mouth, mostly because I truly believe that what I wrote above.  Your clients at the start aren't really what create the most business value (or value for clients themselves)... in the long term what creates value is a long run of above average performance coupled with clients who stick it out because they believe and understand what you are doing so they actually experience your above average performance (so many great investors fail this second test).  There is no value in tricking / marketing clients to join you because they will be the first to bail on you (whether you are doing well or not) for the smallest reasons.  They will then spread bad words about you and it won't do you any good - again, in the long run.  It's much better to get clients / assets only when they are a good match for your philosophy, and to be continually clear about what your strategy is so that over time you can create a clear and accurate honest representation of yourself and your business.  I believe genuine honesty coupled with performance (as well as clear speaking / presentation skills) are key to this business.  Marketing is not remotely required if you only care about terminal value as opposed to near term income.  The behavior of the money management business in general is clearly geared in the opposite way, and that is probably the biggest opportunity to those of us doing this on a small scale with a long time horizon.

When I started my plan was that I would have to do it as a side business until I had $4-5m (with my fee / cost structure that means about $45k in income) which has proven to be pretty accurate based on my personal / family expenses.  Also, I had the assumption that many clients would be on the fence until I had a 5-7 year track record because from I what I knew of psychology that is when a track record becomes "real" to most regular folks.  Both of these assumptions have held true generally from what I have seen.

Overall, I think I have experienced what could be described as typical business results for someone doing this solo without marketing.  I think I've had some lucky breaks getting some big clients, or maybe also having some higher net worth friends than others may have, but I also started right before the Great Recession (and my portfolio focus is on financials generally) so maybe it balances out.

Just my perspective, I appreciate others sharing their experience.  My comments above weren't meant to disagree or argue with anyone with a different perspective, I just wanted to share my own thoughts as a small data point.

Ben
Title: Re: Pabrai/Buffett partnership fee structure
Post by: premfan on November 20, 2013, 04:06:52 PM
It's all family and friends, people I know well and barraged with various investor quotes over the years. Over time, they bought in to the philosophy.

I was lucky in that I had certain tools at my disposal (people close to me with cash balances, ample time to read and learn- started reading about investing in 2008 right out of college, and a huge tolerance for pain).

Luck played a huge role.  Be aware of what tools are available to you and leverage them.

Great job having the guts, conviction, and patience  to go for it! I think its a win/win for you and your clients the way you have the fund structured. Short term pain ( not earning a income) and potential long term gain ( by establishing a public track record).
Title: Re: Pabrai/Buffett partnership fee structure
Post by: oddballstocks on November 20, 2013, 08:07:42 PM
Regarding questions about how those of us who started small have grown.  My AUM / client history is below (formed business in late '06) which I think is typical of a small RIA with only minimal / medium connections to wealth who lives far off the Street:
....
Ben

Ben,

Really appreciate the honesty and transparency, it's cool to see how your business as grown over the years.  You took the ideal route, starting on the side and growing into something sustainable.  I think for younger managers this is probably the best way to start, invest on the side and grow into a bigger asset base.

Nate
Title: Re: Pabrai/Buffett partnership fee structure
Post by: no_free_lunch on November 20, 2013, 08:14:18 PM
Ben,

Do you care to share your results over this period?  It is quite useful as far as correlating performance to growth rate.  If not, it's all good and thanks for sharing your AUM figures.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: benhacker on November 21, 2013, 06:59:55 AM
Quote
Do you care to share your results over this period?

My information is all public. You can find anything you need with Google.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: racemize on November 21, 2013, 07:16:02 AM
Quote
Do you care to share your results over this period?

My information is all public. You can find anything you need with Google.

Since you may not be able to post it, I will (presuming I'm right):
http://www.remickcapital.com/perf.html

Out of curiosity, how are you allowed to post performance online?  Is it because you are an advisor and not running a fund?
Title: Re: Pabrai/Buffett partnership fee structure
Post by: rohitc99 on November 21, 2013, 09:13:17 AM
Regarding questions about how those of us who started small have grown.  My AUM / client history is below (formed business in late '06) which I think is typical of a small RIA with only minimal / medium connections to wealth who lives far off the Street:

Ben

Hi ben
thanks for sharing ..very useful to someone like me who plans to go down the same path. the usual stories of 0 to 1Bn AUM in 2 years are very discouraging and makes you feel like it can never be done
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Philip Morris IV on November 21, 2013, 09:28:04 AM
This is an interesting discussion.  I'm late here but will add from a past experience, and say the points Nate et al brought up about sales/marketing are fair.

I spent 3 years as a retail financial advisor before starting an RIA.  Their attitude is the total opposite - marketing is everything.  Advisors have elaborate systems to quantify their marketing efforts, like spreadsheets on how many calls, how many meetings, yes's/no's, etc. and spend a great deal of time both alone and in daily team meetings analyzing them.

As far as analyzing investments, most advisors are expected to know just a baseline level that's good enough for most people.  Anything beyond that is discouraged.  The prevailing attitude is that only big brokerage analysts are qualified to research stocks.  When I started thinking about leaving, I thought maybe it was just my firm, but it is not.  I frequent another forum for advisors from many different firms and the mentality is similar across the industry.

To an extent, many here represent one end of the spectrum and the retail investment business is the other end.  I think it's reasonable to say that one should find a balance.  For example, great performance can be a form of marketing, but you still have to work on your visibility.  You still have to get in front of new people on a regular basis, present yourself well, schmooze, close them, etc.  It is a skill like any other.  How you raise capital varies, but it's still an effort that needs attention.

I'm not 100% certain on this, but I believe Buffett went through this same realization shortly after forming his first partnership.  He had trouble raising capital, so he studied Dale Carnegie's work and organized seminars for him to meet investors and sell them on himself.  He probably spent a few years doing some serious marketing and facing his fair share of rejection early on (although those people probably regret turning him down!).
Title: Re: Pabrai/Buffett partnership fee structure
Post by: benhacker on November 21, 2013, 09:53:09 AM
Quote
Out of curiosity, how are you allowed to post performance online?  Is it because you are an advisor and not running a fund?

I'm not a lawyer, and I don't hire one either, so take this for what it is.

In layman's terms, I believe Funds in general have rules on putting themselves out as advisors because they are essentially selling private placements in companies (and LP for example).  Private placements have restrictions for obvious reasons.

Separate account guys (assuming they are registered with their State or the SEC) are registered advisors, and can present themselves as such.  there are restrictions are "marketing" but that does not (from what I understand) prevent you from fully disclosing facts about your business / advisory services as long as certain disclosures are met.  The State has never told me there is any issue with publishing performance results.  For this reason, I tend to be highly skeptical of any RIA who doesn't.

I believe there is no reason why I couldn't open an LP in conjunction with my SMAs as long as I disclose it... but for the LP, I believe it would be problematic in the base case to disclose *any* performance details about the LP.

So take this for what it is.  I'm not a lawyery type who reads all the regs in detail, I know there are some who have found interesting ways to get around some of these general guidelines, and I do know some people who have found a way around typical rules for LP / fund limitations (even ignoring the performance marketing aspects) such as # of clients, wealth of clients, registration, etc.  Basically what I'm saying is that after extensive research on these topics over the years and talking to many others in the field, I think there is a lot of grey area and nuance.

My basic answers for RIA / aspiring RIAs (in the US) -- Call your state regulator and ask what is needed.  They are at the end of the day your ultimate arbiter of what is "ok".  I'm reviewed every 3 years by the state or Oregon and I just do what they say to do.... if they don't have any problems with my website I don't change it (and I know they look at it).

Hope that helps.

Ben
Title: Re: Pabrai/Buffett partnership fee structure
Post by: ageofsocrates on November 24, 2013, 05:01:46 AM
Regarding questions about how those of us who started small have grown.  My AUM / client history is below (formed business in late '06) which I think is typical of a small RIA with only minimal / medium connections to wealth who lives far off the Street:

YE '07 - $0.31m / 11
YE '08 - $0.31m / 15
YE '09 - $1.06m / 19
YE '10 - $2.42m / 30
YE '11 - $3.25m / 34
YE '12 - $3.82m / 39

Probably will close out this year with $6-6.5m and 50+ clients.

For what it's worth, I think there are many ways to success, and they mostly depend on what you want / define as success.

I started at the urging of some friends, who persisted to harass me for several years after college.  They suggested to me my business model based on my concerns, which at the time were:

1) I liked investing, I don't like dealing with clients / running a business (I wouldn't describe myself as entrepreneurial)
2) I had a full time job, and I hated the idea of marketing financial services to get a size which would sustain itself

My friends just said to manage the assets of clients the same as my own, no exceptions, and just tell clients to take it or leave it.  They told me to setup shop with the expectation that clients wouldn't talk to me, and keep it that way.  Seemed reasonable to me, so that's what I did.

For those who think this is so hard, I can only say that "yes" it take a long time commitment... but I think it's simple (maybe not easy).  I would say that if you are managing your own money *and* you strongly believe you are exceptional at managing assets, I think the stretch to managing money isn't a big one.  So what if you don't make money for 5-7 years... what does that matter?  If you want a "job" that can generate high income immediately, well then I agree it sucks, but how many people really are doing this for that reason (maybe a lot, but I doubt it)? 

This is a job you can do on the side (obviously not ideal, but if you are managing your own money you likely are already doing that right?).  Also, as with almost any business, the value (NPV) of the business lies deeply out in the future cash flows, and I think if you think of this as creating a business (not really my focus, but it's certainly an aspect of what I do this) you have to think the same way.  Assuming you can do 2-3% above market after fees for 10 years (not 5) I can *guarantee* you that unless you are trying to hide, you will be found whether you doing any marketing at all.

For me, I have always done no marketing, just word of mouth, mostly because I truly believe that what I wrote above.  Your clients at the start aren't really what create the most business value (or value for clients themselves)... in the long term what creates value is a long run of above average performance coupled with clients who stick it out because they believe and understand what you are doing so they actually experience your above average performance (so many great investors fail this second test).  There is no value in tricking / marketing clients to join you because they will be the first to bail on you (whether you are doing well or not) for the smallest reasons.  They will then spread bad words about you and it won't do you any good - again, in the long run.  It's much better to get clients / assets only when they are a good match for your philosophy, and to be continually clear about what your strategy is so that over time you can create a clear and accurate honest representation of yourself and your business.  I believe genuine honesty coupled with performance (as well as clear speaking / presentation skills) are key to this business.  Marketing is not remotely required if you only care about terminal value as opposed to near term income.  The behavior of the money management business in general is clearly geared in the opposite way, and that is probably the biggest opportunity to those of us doing this on a small scale with a long time horizon.

When I started my plan was that I would have to do it as a side business until I had $4-5m (with my fee / cost structure that means about $45k in income) which has proven to be pretty accurate based on my personal / family expenses.  Also, I had the assumption that many clients would be on the fence until I had a 5-7 year track record because from I what I knew of psychology that is when a track record becomes "real" to most regular folks.  Both of these assumptions have held true generally from what I have seen.

Overall, I think I have experienced what could be described as typical business results for someone doing this solo without marketing.  I think I've had some lucky breaks getting some big clients, or maybe also having some higher net worth friends than others may have, but I also started right before the Great Recession (and my portfolio focus is on financials generally) so maybe it balances out.

Just my perspective, I appreciate others sharing their experience.  My comments above weren't meant to disagree or argue with anyone with a different perspective, I just wanted to share my own thoughts as a small data point.

Ben

Hi Benhacker.

Just a quick question. How many hours did you put in researching companies when you were working at a fulltime job?
Title: Re: Pabrai/Buffett partnership fee structure
Post by: benhacker on November 24, 2013, 11:36:26 AM
Quote
Just a quick question. How many hours did you put in researching companies when you were working at a fulltime job?

25-30 on average spending time on investing (message boards, K's, Q's, books, etc).  Some weeks more, some weeks less.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: shan on January 20, 2014, 04:03:12 PM
Great discussion!

It will be great if someone could share what they do for tax accounting for the client's gains/losses in their funds?

I am planning to start my fund (limited partnership with GP as LLC) with Buffett/Pabrai style 6/20 fee structure. I am currently struggling with understanding how to account for the  taxes for different clients. I saw that some big funds maintain two types of book-keeping accounts for each client - 1.capital account (takes into account additions, withdrawals) , 2. Tax capital account (capital account + gains - losses)

PS: I am aware about the K-1 tax filing requirements, my question is more towards book-keeping for client taxes.

Thanks,
Shan
Title: Re: Pabrai/Buffett partnership fee structure
Post by: slkiel on January 20, 2014, 05:37:52 PM
As much as I like the Pabrai/Buffett incentive fee structure, there is a big piece unmentioned that makes it unworkable for small funds raising money from friends and family. In fact I did not even realize this when I started my fund in 2012. In order to charge performance fees in the U.S., a limited partner must be a qualified client. States have different rules on what asset size they must meet, but more states are adopting the new federal standard, which is $2 million not counting the value of the primary residence, or $1 million invested in the fund. This can be a huge problem if you choose to not take a management fee. For example, I currently have 10 limited partners, but only three of them are qualified clients.

This was a problem (for the general partner, at least) that didn't exist when Buffett had his fund. Additionally, when Pabrai launched his fund, the requirement was much lower. I believe it was the same as the accredited investor standard back then.

So, if your friends and family aren't qualified clients, and you choose the Pabrai/Buffett fee structure, you're going to be working for free whether you like or not until you can either get the investors up to that standard with the fund's performance, or you attract wealthier clients.

This is the sad part of these regulations, where in the name of protection, it reduces the ability of funds to bootstrap. At least for those who don't have wealthy friends and family. Though, clearly from the examples on this thread, many have powered through and done it anyway, whether they are rightly compensated for it in the beginning or not. I commend those of you that have done this, but it would be very difficult to do without an understanding spouse or some other income stream. 
Title: Re: Pabrai/Buffett partnership fee structure
Post by: shan on January 20, 2014, 07:12:47 PM
As much as I like the Pabrai/Buffett incentive fee structure, there is a big piece unmentioned that makes it unworkable for small funds raising money from friends and family. In fact I did not even realize this when I started my fund in 2012. In order to charge performance fees in the U.S., a limited partner must be a qualified client. States have different rules on what asset size they must meet, but more states are adopting the new federal standard, which is $2 million not counting the value of the primary residence, or $1 million invested in the fund. This can be a huge problem if you choose to not take a management fee. For example, I currently have 10 limited partners, but only three of them are qualified clients.

This was a problem (for the general partner, at least) that didn't exist when Buffett had his fund. Additionally, when Pabrai launched his fund, the requirement was much lower. I believe it was the same as the accredited investor standard back then.

So, if your friends and family aren't qualified clients, and you choose the Pabrai/Buffett fee structure, you're going to be working for free whether you like or not until you can either get the investors up to that standard with the fund's performance, or you attract wealthier clients.

This is the sad part of these regulations, where in the name of protection, it reduces the ability of funds to bootstrap. At least for those who don't have wealthy friends and family. Though, clearly from the examples on this thread, many have powered through and done it anyway, whether they are rightly compensated for it in the beginning or not. I commend those of you that have done this, but it would be very difficult to do without an understanding spouse or some other income stream. 

I checked the requirements on SEC recently and it seems that you are mentioning a 3(c)(7) fund. For a 3(c)(7), the requirement is qualified clients and the number of client is now 1999 (used to be 499).

But you can still do a 3(c)(1) fund with upto 99  accredited investors. The accredited definition is now 1M assets without residence or 200K per year income. In fact, you can have 35 non-accredited investors but then you cannot advertise freely as allowed by JOBS act.

Info with quick summary is here - http://online.barrons.com/article/SB50001424053111903591504577361903353035884.html and you can check SEC webpages for Dodd-Frank and JOBS act updates which will confirm the Barron's article.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: slkiel on January 20, 2014, 09:07:34 PM
This is what I didn't fully understand until I started the fund. You are right about the accredited investor requirements. However, in order to charge performance fees, the LP has to also be a qualified client with the minimum asset requirements that I listed. So, for example, I have 10 investors. Three of them are qualified clients (assets of at least $2m or at least $1m in the fund). I can charge them performance/incentive fees. Eight of them are accredited investors. As a 3(c)1 fund I can have up to 35 non-accredited investors in the fund, so no problem on the two who are not accredited (other than higher liability potential from them). But, I cannot charge performance fees to the seven investors who are not qualified clients. 

The qualified client levels for sub $100m (I believe) funds are defined by the state rules, which are different across states. However, there is a model law movement to revise the standards in the states to match the SEC definition. Many states have done this already, and others are following suit. For all the states I've looked at who have not adopted the $2m threshold, they still have an old $1.5m level.

For 3(c)(7) funds, I believe all of the LPs must be qualified clients.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Redskin212 on January 20, 2014, 09:21:49 PM
slkiel

If I understand correctly, in order to charge a performance fee partners in your fund must be both an accredited investor and a qualified client?

Redskin
Title: Re: Pabrai/Buffett partnership fee structure
Post by: slkiel on January 20, 2014, 10:05:03 PM
All qualified clients are accredited investors.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: shan on January 20, 2014, 10:33:12 PM
This is what I didn't fully understand until I started the fund. You are right about the accredited investor requirements. However, in order to charge performance fees, the LP has to also be a qualified client with the minimum asset requirements that I listed. So, for example, I have 10 investors. Three of them are qualified clients (assets of at least $2m or at least $1m in the fund). I can charge them performance/incentive fees. Eight of them are accredited investors. As a 3(c)1 fund I can have up to 35 non-accredited investors in the fund, so no problem on the two who are not accredited (other than higher liability potential from them). But, I cannot charge performance fees to the seven investors who are not qualified clients. 

The qualified client levels for sub $100m (I believe) funds are defined by the state rules, which are different across states. However, there is a model law movement to revise the standards in the states to match the SEC definition. Many states have done this already, and others are following suit. For all the states I've looked at who have not adopted the $2m threshold, they still have an old $1.5m level.

For 3(c)(7) funds, I believe all of the LPs must be qualified clients.

I don't fully understand this yet.

1. Do you where the requirement for performance fees to be applied to only qualified clients is given? Is that part of 506 code?

2. Also did you try to register as an exempt registered investment advisor?  For example, California allows exempt registered investment advisor criteria to be the same as SEC. See section "New Exemptions" here - http://www.reedsmith.com/New-California-Exemption-for-Investment-Advisers-to-Private-Funds-09-19-2012/

3. Can you clarify what you mean by the $2M threshold?

4. If you don't get exemption from state, it only means that you have to be a registered investment adviser there. Why does it affect the charging of performance fees?
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Parsad on January 20, 2014, 10:41:14 PM
slkiel

If I understand correctly, in order to charge a performance fee partners in your fund must be both an accredited investor and a qualified client?

Redskin

Yup, if you charge an incentive fee, partners need to be qualified.  Cheers!
Title: Re: Pabrai/Buffett partnership fee structure
Post by: shan on January 20, 2014, 10:43:21 PM
I think I found most of the answers here - http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171487308#.Ut4WU2TTk10

This sucks for people who didn't start their fund before 2012 :(

It says cannot charge performance fees to clients other than "qualified clients". So charging management fee (1-2%) is allowed?
Title: Re: Pabrai/Buffett partnership fee structure
Post by: abitofvalue on January 23, 2014, 06:16:25 PM
Phenomenal discussion in this thread.  thanks a lot.

How did a lot of you get started? Did you just take your personal account trading history and use that as your track record?  I have had a few friends ask me to manage money for them but have been deferring till I can figure out how to make this work beyond the initial few friends.  I suspect a few of you may have been in a similar position so any advice on how to think about it beyond initial clients?

In terms of soliciting new clients when you were starting out and asked someone to invest with you did your personal trading account sit-in as a part of your track record?  I presume a friend of a friend would want some information before investing with you.

Also, how did you guys first set-up? the initial costs seem pretty daunting.  anything you wish you had done differently that we could could benefit from?

I am amazed by the number of people who started with sub $1mm AUM.  Would love to learn more about how to do this.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: merkhet on January 23, 2014, 06:18:43 PM
I am amazed by the number of people who started with sub $1mm AUM.  Would love to learn more about how to do this.

My answer was to suffer for a while and use my savings.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: slkiel on January 23, 2014, 07:00:35 PM
I am amazed by the number of people who started with sub $1mm AUM.  Would love to learn more about how to do this.

I think the smartest way to do it is the way Pabrai did (and Buffett for that matter). He made a bunch of money personally in the market over several years, and then was able to start with a decent amount because of that. It seems like people came to Pabrai. The problem with starting very small (and I'm one of those that did), is that you are desperate to raise money in the beginning. You need to be careful that that doesn't affect your portfolio management decisions. You also don't want to spend too much of your time trying to raise money, when you should be doing research.

Even if you're young, if you're really as good as you think you are, you should be able to grow your own money to a few hundred thousand. You may need to really scrimp and save to start though. At that point, you should be able to get started and there would likely be some friends and family that would know about you and kick in something as well, even if as small as $10k.

Once you get going, as long as perform, random acquaintances will get interested. You just need to keep putting yourself out there. I think for most of us who have funds, it took longer than we expected. But, if you perform, you'll make it eventually if you are committed and your funds will mushroom at some point. You'll also learn more in your first year running the fund than you would have ever expected.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: abitofvalue on January 24, 2014, 07:28:32 AM
Thanks guys this is very helpful.  On building / marketing your track record -  I have seen a few of Buffett's quotes about getting an audited track record as soon as possible.  Think he said that would be the one thing he would do differently (get an audited track record sooner)

What exactly does this mean - is it just as it sounds go to a CPA with your brokerage statements etc? I assume you need to have a certain amount of assets for this to be worthwhile.  Just wondering how far you went back - think I saw an interview with Guy Spier about this where he said he thinks of his track record as including his personal record from the day he started trading.  Did you guys do that too?  I assume you started off with your own personal trading account and didn't start off with an account in the name of your business.  Do you use your personal trading history for this?
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Ham Hockers on January 24, 2014, 07:37:06 AM
Thanks guys this is very helpful.  On building / marketing your track record -  I have seen a few of Buffett's quotes about getting an audited track record as soon as possible.  Think he said that would be the one thing he would do differently (get an audited track record sooner)

What exactly does this mean - is it just as it sounds go to a CPA with your brokerage statements etc? I assume you need to have a certain amount of assets for this to be worthwhile.  Just wondering how far you went back - think I saw an interview with Guy Spier about this where he said he thinks of his track record as including his personal record from the day he started trading.  Did you guys do that too?  I assume you started off with your own personal trading account and didn't start off with an account in the name of your business.  Do you use your personal trading history for this?

This doesn't answer your question, but if you're going to use your personal trading history as part of your track record, I'd recommend that you monitor your performance exactly as you would as a fund, even before going to get it audited.  For the most part, this means that taking the numbers your brokerage firm gives you isn't good enough.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: DoddDisciple on February 18, 2014, 05:39:23 PM
I wasn't aware of the recent 2012 designation of accredited vs qualified investors, but overall it just seems to make it unlikely for anyone to want to start a fund from scratch, especially something more eclectic.

With accredited investors, unless they're supplying a huge amount of money to your fund, you can only charge a 2% management fee, regardless of results. So to make $70k, not factoring in all supplemental business and advisory costs, you'd have to raise $3.5M. There's not much reason to do anything beyond just sticking the money in something plain and marketing for more money after that, since you're not going to get any of the upside.

To actually get a performance fee, you have to have qualified investors with even higher net worth requirements, and the performance fee is limited to 20%. On the same $3.5M, let's say you do 20% and take 20% of the upside beyond 5%. You're only talking about $100k here, which is a great salary, but again, you have all these other fees and it's not guaranteed.

I can now see why success in the investment field is 99% based on the connections you have.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: oddballstocks on February 18, 2014, 06:05:08 PM
I wasn't aware of the recent 2012 designation of accredited vs qualified investors, but overall it just seems to make it unlikely for anyone to want to start a fund from scratch, especially something more eclectic.

With accredited investors, unless they're supplying a huge amount of money to your fund, you can only charge a 2% management fee, regardless of results. So to make $70k, not factoring in all supplemental business and advisory costs, you'd have to raise $3.5M. There's not much reason to do anything beyond just sticking the money in something plain and marketing for more money after that, since you're not going to get any of the upside.

To actually get a performance fee, you have to have qualified investors with even higher net worth requirements, and the performance fee is limited to 20%. On the same $3.5M, let's say you do 20% and take 20% of the upside beyond 5%. You're only talking about $100k here, which is a great salary, but again, you have all these other fees and it's not guaranteed.

I can now see why success in the investment field is 99% based on the connections you have.

Connections and AUM.  When I see this math I wonder why someone's taking the risk of managing money?  Most people doing this can make the same amount doing the same thing for someone else with zero risk.  There is zero liability risk etc.

Unless you can raise a substantial amount of capital, or you're doing it on the side for some spare pocket change the economics are tough.

On the other hand I know someone who opened a RIA.  They are managing any and all capital.  If a retiree wants them to manage their 401k they have a strategy for it.  If someone wants a value strategy they have that as well.  They aren't AUM constrained, I like that approach a lot.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: DoddDisciple on February 18, 2014, 06:31:15 PM
I wasn't aware of the recent 2012 designation of accredited vs qualified investors, but overall it just seems to make it unlikely for anyone to want to start a fund from scratch, especially something more eclectic.

With accredited investors, unless they're supplying a huge amount of money to your fund, you can only charge a 2% management fee, regardless of results. So to make $70k, not factoring in all supplemental business and advisory costs, you'd have to raise $3.5M. There's not much reason to do anything beyond just sticking the money in something plain and marketing for more money after that, since you're not going to get any of the upside.

To actually get a performance fee, you have to have qualified investors with even higher net worth requirements, and the performance fee is limited to 20%. On the same $3.5M, let's say you do 20% and take 20% of the upside beyond 5%. You're only talking about $100k here, which is a great salary, but again, you have all these other fees and it's not guaranteed.

I can now see why success in the investment field is 99% based on the connections you have.

Connections and AUM.  When I see this math I wonder why someone's taking the risk of managing money?  Most people doing this can make the same amount doing the same thing for someone else with zero risk.  There is zero liability risk etc.

Unless you can raise a substantial amount of capital, or you're doing it on the side for some spare pocket change the economics are tough.

On the other hand I know someone who opened a RIA.  They are managing any and all capital.  If a retiree wants them to manage their 401k they have a strategy for it.  If someone wants a value strategy they have that as well.  They aren't AUM constrained, I like that approach a lot.

Yeah, I remembered your post on here when I found this out. I was looking to consolidate some family accounts at IB and operating them pro bono, but unlike it the past when I was very explicit in my questions and was told one thing, when it finally got to opening the accounts, what I was told was possible, wasn't, and I was just curious and looked at RIAs some.

The economics make no sense to those without connections or those with large AUM. You couldn't just get a few people today together and offer the same Buffett partnership scheme. If I'm reading this right, you can't get 5 people to pitch in $100k each and take a performance fee. I can see why innovation is in such short supply.

In regards to the RIA you know, if you spend a few hours with each and charge a fixed fee or management fee, I can see it working, but then of course, you're almost in the marketing business instead of the investing business. Then again, most people aren't willing to just pick up a book to figure out how to invest the money themselves (index funds, etc.), so there is a market for it.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: bookie71 on February 18, 2014, 07:00:41 PM
"The economics make no sense to those without connections or those with large AUM. You couldn't just get a few people today together and offer the same Buffett partnership scheme. If I'm reading this right, you can't get 5 people to pitch in $100k each and take a performance fee. I can see why innovation is in such short supply."
.
BUT 100,000 back then is equivalent to how many million now?
Title: Re: Pabrai/Buffett partnership fee structure
Post by: JBird on February 18, 2014, 07:16:12 PM
"The economics make no sense to those without connections or those with large AUM. You couldn't just get a few people today together and offer the same Buffett partnership scheme. If I'm reading this right, you can't get 5 people to pitch in $100k each and take a performance fee. I can see why innovation is in such short supply."

BUT 100,000 back then is equivalent to how many million now?

Buffett partnership started with $105,000 in 1956. That's equivalent to $856,459 today.

http://www.bls.gov/data/inflation_calculator.htm
Title: Re: Pabrai/Buffett partnership fee structure
Post by: DoddDisciple on February 18, 2014, 07:20:00 PM
I was just talking about $500k today, not in Buffett's time. I don't think you could setup a $500k investment partnership and charge performance fees unless everyone was qualified investors.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: slkiel on February 18, 2014, 07:26:01 PM
I read this a few days ago and really identified with it: Some Thoughts on Becoming an Independent Fund Manager, http://www.rvcapital.ch/pdfs/Some_Thoughts_on_Becoming_an_Independent_Fund_Manager.pdf

I'd excerpt parts of it, but all of it is great. Highly recommend reading it if you have a small fund or if you're thinking of starting a fund.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: matjone on February 18, 2014, 07:45:36 PM
I wasn't aware of the recent 2012 designation of accredited vs qualified investors, but overall it just seems to make it unlikely for anyone to want to start a fund from scratch, especially something more eclectic.

With accredited investors, unless they're supplying a huge amount of money to your fund, you can only charge a 2% management fee, regardless of results. So to make $70k, not factoring in all supplemental business and advisory costs, you'd have to raise $3.5M. There's not much reason to do anything beyond just sticking the money in something plain and marketing for more money after that, since you're not going to get any of the upside.

To actually get a performance fee, you have to have qualified investors with even higher net worth requirements, and the performance fee is limited to 20%. On the same $3.5M, let's say you do 20% and take 20% of the upside beyond 5%. You're only talking about $100k here, which is a great salary, but again, you have all these other fees and it's not guaranteed.

I can now see why success in the investment field is 99% based on the connections you have.

Connections and AUM.  When I see this math I wonder why someone's taking the risk of managing money?  Most people doing this can make the same amount doing the same thing for someone else with zero risk.  There is zero liability risk etc.

Unless you can raise a substantial amount of capital, or you're doing it on the side for some spare pocket change the economics are tough.

On the other hand I know someone who opened a RIA.  They are managing any and all capital.  If a retiree wants them to manage their 401k they have a strategy for it.  If someone wants a value strategy they have that as well.  They aren't AUM constrained, I like that approach a lot.

What's to stop you from starting something on the side and keeping your day job to feed the family?  You are already doing that now and doing alright.  The management of it will certainly take some time commitment but there is also a huge potential reward to yourself and others.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Mephistopheles on February 18, 2014, 07:46:29 PM
The state rules for performance fees vary. You don't necessarily need to have qualified or accredited investors to charge a performance fee. In NJ, for example, as long as you don't register with the state, you can charge performance fees to anyone. And you don't have to register with the state unless you manage 5 partnerships or more.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Kiltacular on February 18, 2014, 08:05:42 PM
Quote
I wasn't aware of the recent 2012 designation of accredited vs qualified investors, but overall it just seems to make it unlikely for anyone to want to start a fund from scratch, especially something more eclectic.

It seems like some of the rule changes reduce competition.  This seems to often happen, in many industries, when regulations are increased.  They are often increased after a crisis.  The large, entrenched players welcome the new regulations.  We saw what the Sarb./Oxley regs. did for smaller public companies, we saw what the new banking regulations did for the smaller banks.

This isn't to suggest things should go unregulated.  It is just something I've become aware of over the years.  The big players (who survive the crisis that is the impetus for the new regulations) often appear to have a much stronger position going forward.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: DoddDisciple on February 18, 2014, 08:20:30 PM
Quote
I wasn't aware of the recent 2012 designation of accredited vs qualified investors, but overall it just seems to make it unlikely for anyone to want to start a fund from scratch, especially something more eclectic.

It seems like some of the rule changes reduce competition.  This seems to often happen, in many industries, when regulations are increased.  They are often increased after a crisis.  The large, entrenched players welcome the new regulations.  We saw what the Sarb./Oxley regs. did for smaller public companies, we saw what the new banking regulations did for the smaller banks.

This isn't to suggest things should go unregulated.  It is just something I've become aware of over the years.  The big players (who survive the crisis that is the impetus for the new regulations) often appear to have a much stronger position going forward.

Exactly. This is what really surprised me about this regulation. I may just be stupid, but I thought you could charge a performance fee to accredited investors and not just a management fee. Who can blame Sonkin for shutting down Hummingbird/Tarsier in this light; I'm sure his newly offered day job would have paid more!

Really, the finance industry seems to exist to just serve itself. I joking believe the master plan is to get most people stuck in index funds but charge 1% or more for the privilege. I've seen this in so many retirement accounts. You have the manager leeching 20% per year or so if you're lucky, and then you have the government sucking out the reduced amount when distributions are forced out.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Tim Eriksen on February 18, 2014, 08:30:12 PM
The state rules for performance fees vary. You don't necessarily need to have qualified or accredited investors to charge a performance fee. In NJ, for example, as long as you don't register with the state, you can charge performance fees to anyone. And you don't have to register with the state unless you manage 5 partnerships or more.

NJ would be quite unusual.  Most states mimic the SEC rules.  A few are more restrictive, like Washington.  I do know that the SEC established that performance fees may only be charged to qualified clients ($2 million net worth and above, up from $1.5 million previously).   As to earlier posts, there is no SEC rule limiting fees to 2% and performance fees to 20%.  It is possible to charge more, but you will have to include a lot of disclosure.         
Title: Re: Pabrai/Buffett partnership fee structure
Post by: John Hjorth on July 12, 2017, 02:05:42 PM
... The fee structure that Buffett had was that he got 50% of profits because he had a 50% interest in the partnership so legally (remember I could be wrong) he wasn't charging a performance fee rather he was entitled 50% of the profits because he owned 50% of the company. ...

This basic assumption for your post about the early partnership years is not correct, Cameron.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: racemize on July 12, 2017, 02:12:21 PM
I am reading Benjamin Graham: The Father of Financial... while flying home today. In it, the authors describe a fee structure where he gets a small salary and then 20% of profits over 6% hurdle. So, at least for me, this solves the question of why Buffett used 6%. As to why Graham did, maybe it was the prevailing high grade bond rate at the time?  i will need to look it up when I get home.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: BRK7 on July 12, 2017, 03:32:28 PM

...for a regular hedge fund the general partner usually only owns 1% of the limited partnership.

Not true.  The GP can own anywhere between 0% and 100%, unless there is something in the limited partnership agreement that stipulates otherwise. 

Typically, outside investors will want the GP to have "skin in the game"  and it is not uncommon for the GP to be a large investor (as a % of total assets) in a given fund. 
Title: Re: Pabrai/Buffett partnership fee structure
Post by: John Hjorth on July 12, 2017, 03:38:12 PM
Cameron,

I apologize for a non-constructive reply to you here.

Mr. Buffet started from the start block with the first partnership with an initial capital of USD 105,000 from the limited partners [family members], and USD 100 of his own. With a 4 per cent watermark, taking 50 per cent of the total profit excess of 4 per cent.

When he was extremely good at what he was doing at that time under such an agreement with the limited partners, he got totally extreme returns on invested capital in the early phase of the whole thing.

One can actually say, that he was levered/amplified 1,050 times on the upside [105,000/100, and naturally still subject to the watermark], while at the same time participating in losses equally with his limited partners.

His returns on his own capital account in the early years must been in thousands of per cents, however I have never seen any attempt to do the calculations, most likely because his withdrawals and capital injections to his capital accounts in the partnerships are still today not disclosed.

Link (https://www.gurufocus.com/news/126451/original-warren-buffett-partnership-agreement-found-here). You have to to add the "X/42"'s in the agreement to understand the built-in profit sharing mechanism.

This was for the first partnership.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Read the Footnotes on July 12, 2017, 04:00:18 PM

This is why Buffett had to open new partnerships when new people tried to get him to invest for them because if they were to invest in the original partnership he would have to dilute his 50% in the original and would thus mean he was no longer entitled to the 50% of the profits because he didn't have a contract stating that he got 50% of profits.

Actually, additional partnerships were opened due to the regulatory limitations on the maximum number of partners allowable in each partnership at the time. It had nothing to do with his ownership interest in each partnership.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Tim Eriksen on July 12, 2017, 04:04:00 PM
I'm really trying to understand this, but does the fact that the partners get 21/42 not mean that they own 50% of the partnership? Or am I completely off base because under X it says: "A limited partner has no right to substitute an assignee as contributor in his place.", this doesn't constitute ownership?

It is not referring to ownership, but to share of gains.  Completely different. 
Title: Re: Pabrai/Buffett partnership fee structure
Post by: John Hjorth on July 12, 2017, 04:05:16 PM
Cameron,

I apologize for a non-constructive reply to you here.

Mr. Buffet started from the start block with the first partnership with an initial capital of USD 105,000 from the limited partners [family members], and USD 100 of his own. With a 4 per cent watermark, taking 50 per cent of the total profit excess of 4 per cent.

When he was extreme good at what he was doing at that time under such an agreement with the limited partners, he got totally extreme returns on invested capital in the early phase of the whole thing.

One can actually say, that he was levered 1,050 times on the upside [105,000/100, and naturally still subject to the watermark], while at the same time participating in losses equally with his limited partners.

His returns on his own capital account in the early years must been in thousands of per cents, however I have never seen any attempt to do the calculations, most likely because his withdrawals and capital injections to his capital accounts in the partnerships are still today not disclosed.

Link (https://www.gurufocus.com/news/126451/original-warren-buffett-partnership-agreement-found-here). You have add the "X/42"'s in the agreement to understand the built-in profit sharing mechanism.

This was for the first partnership.


I'm really trying to understand this, but does the fact that the partners get 21/42 not mean that they own 50% of the partnership? Or am I completely off base because under X it says: "A limited partner has no right to substitute an assignee as contributor in his place.", this doesn't constitute ownership?

Cameron,

No, you are confusing the profit sharing agrement with capital acccounts of the general partner and the limited partners. The capital accounts of the partners [general or limited] define the ideal share for each partners share of the whole partnerships net worth.

Hint: Fire up Excel, and try to do some calculations.

Edit:

Tim beat me to it! [ ; - ) ]
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Tim Eriksen on July 12, 2017, 04:22:02 PM
The SEC says you cannot receive incentive compensation from anyone who is not a qualified investor.  I don't think there is any loophole around that.   
Title: Re: Pabrai/Buffett partnership fee structure
Post by: ValuePadawan on November 28, 2019, 07:23:31 PM
Hello COBF fund experts I'm looking for a little advice as it's difficult to find the pertinent information online I thought you would be the best resource.

First of all I wish to set up a fund or structure where I manage money using the 0/6/25 fee structure.

I'm in my 20's located in Ontario, Canada.

I have a family member who is independently wealthy and wants me to manage their money, I would of course put in all my investment capital.

I've heard a limited partnership is advantageous for tax purposes as the income flows through to the respective partners. Am I misinformed? Are other structures more advantageous.

I've also heard it can be difficult setting up a fund in Ontario without extensive employment experience in the sector which I lack.

If there are any pitfalls or mistakes that I may want to avoid?

In my current financial position I can wait years for management fees to start coming in I am not strapped for cash (no wife and kids).

Would I be better off with a more informal arrangement to avoid all the regulatory fees?

How much does it cost at bare minimum to keep up with regulatory costs in Ontario annually (ballpark)

Any other comments concerns or advice is greatly appreciated.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: stahleyp on November 29, 2019, 04:49:35 AM
Hello COBF fund experts I'm looking for a little advice as it's difficult to find the pertinent information online I thought you would be the best resource.

First of all I wish to set up a fund or structure where I manage money using the 0/6/25 fee structure.

I'm in my 20's located in Ontario, Canada.

I have a family member who is independently wealthy and wants me to manage their money, I would of course put in all my investment capital.

I've heard a limited partnership is advantageous for tax purposes as the income flows through to the respective partners. Am I misinformed? Are other structures more advantageous.

I've also heard it can be difficult setting up a fund in Ontario without extensive employment experience in the sector which I lack.

If there are any pitfalls or mistakes that I may want to avoid?

In my current financial position I can wait years for management fees to start coming in I am not strapped for cash (no wife and kids).

Would I be better off with a more informal arrangement to avoid all the regulatory fees?

How much does it cost at bare minimum to keep up with regulatory costs in Ontario annually (ballpark)

Any other comments concerns or advice is greatly appreciated.

I can't speak about Canada but in the states you can run a fund for about $20,000 if you carry the load on some of the paperwork from my understanding.

Also, would you be managing a large part or all of the family member's assets? There will be points in time where you suck. How would that affect your relationship?
Title: Re: Pabrai/Buffett partnership fee structure
Post by: scorpioncapital on November 29, 2019, 05:44:10 AM
Hello COBF fund experts I'm looking for a little advice as it's difficult to find the pertinent information online I thought you would be the best resource.

First of all I wish to set up a fund or structure where I manage money using the 0/6/25 fee structure.

I'm in my 20's located in Ontario, Canada.

I have a family member who is independently wealthy and wants me to manage their money, I would of course put in all my investment capital.

I've heard a limited partnership is advantageous for tax purposes as the income flows through to the respective partners. Am I misinformed? Are other structures more advantageous.

I've also heard it can be difficult setting up a fund in Ontario without extensive employment experience in the sector which I lack.

If there are any pitfalls or mistakes that I may want to avoid?

In my current financial position I can wait years for management fees to start coming in I am not strapped for cash (no wife and kids).

Would I be better off with a more informal arrangement to avoid all the regulatory fees?

How much does it cost at bare minimum to keep up with regulatory costs in Ontario annually (ballpark)

Any other comments concerns or advice is greatly appreciated.

In the situation you mentioned there are virtually no regulatory costs except corporate tax return. The reason I say this is because for this situation I suggest a much simpler solution. Incorporate a company for $1000 with your relative and yourself as shareholders. Your only real running costs are annual tax returns which shouldn't run more than $2000. I can't imagine anything cheaper than this solution except...there is also an IB platform product called family office which allows you to trade on behalf of your relative's capital. You can segregate funds and even set a compensation fee percentage. This is probably even cheaper as it's just in your own name. Given the relationship I do not think there is any regulatory requirement.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: longlake95 on November 29, 2019, 06:20:17 AM
Be careful, I have been looking at this for sometime - in Ontario. There are significant regulatory barriers. You will trip the "advising and dealing" in securities rule, therefore you will need to be registered and be a portfolio manager (you can't just LP like you can in the U.S. - our regulators are anti business growth and cater to the big firms). PM me if you want more detail.

LL
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Cigarbutt on November 29, 2019, 07:16:08 AM
Be careful, I have been looking at this for sometime - in Ontario. There are significant regulatory barriers. You will trip the "advising and dealing" in securities rule, therefore you will need to be registered and be a portfolio manager (you can't just LP like you can in the U.S. - our regulators are anti business growth and cater to the big firms). PM me if you want more detail.

LL
I am not as familiar with the Ontario-specifics but the regulations are pretty uniform on this side of the border for that aspect and I tend to agree with longlake in the sense that your efforts are unlikely to succeed if your goal is to go through a formal arrangement.
You have two hurdles:
1-Obtain an exemption, when you accept money from somebody else to "manage" it, in order to avoid the prospectus rules. This would essentially involve producing an offering memorandum showing that your 'investors' are rich, sophisticated, 'accredited' and are ready to (consent to) lose all their money because they think you are great.
2-Obtain an exemption in order to avoid the need to register yourself as some kind of an adviser. This requires time, potential frustration, fees and your job is then to somehow convince somebody that you have the capacity and ability to do this outside of official bounds.
https://www.getsmarteraboutmoney.ca/protect-your-money/investor-protection/regulation-in-canada/types-of-prospectus-exemptions/
https://www.osc.gov.on.ca/en/Dealers_asking-relief_index.htm

I hear what longlake is saying about investment managers being stifled but this area has always attracted individuals with poor credentials (and poor incentives) and it may be a price to pay for the collective blanket of security.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: longlake95 on November 29, 2019, 08:03:34 AM
I am familiar with Ontario and the National Instruments. I won't argue that some regulation is good - of course it is. However, the current rules stifle legitimate people starting new firms unless you fit a very narrow scope of rules ( no allowance for unusual but safe and legitimate situations). Even with the strict rules, we still have blow-ups and crooks in Canada. That likely won't stop. It would very good if we moved to the LP, accredited investor model that the U.S. uses.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Cigarbutt on November 29, 2019, 08:18:37 AM
I am familiar with Ontario and the National Instruments. I won't argue that some regulation is good - of course it is. However, the current rules stifle legitimate people starting new firms unless you fit a very narrow scope of rules ( no allowance for unusual but safe and legitimate situations). Even with the strict rules, we still have blow-ups and crooks in Canada. That likely won't stop. It would very good if we moved to the LP, accredited investor model that the U.S. uses.
Absolutely.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: returnonmycapital on November 29, 2019, 09:04:21 AM
Being remunerated for managing other people's capital (advising, in regulatory parlance) has regulatory implications. The first being licensing. You must become licensed as a portfolio manager or investment fund manager. In order to be licensed, certain prerequisites are essential: experience and education. Education is typically earned through the CFA Institute exams and eventual charter. In order to get a CFA charter, a minimum of 3 years' worth of relevant investment analysis/management work is required. The regulators will expect some, if not all, of this to be realized prior to considering granting a license. Meaning, you may have to work for another registered firm prior to setting up on your own.

The operating expenses are only somewhat onerous and mainly comprise:

1) Setting up of a management company (licensing requires a legal entity) ($500 setup and then ongoing registration fees with the regulator of at least $1,100/yr - depending on entity revenues);
2) Production of a Policies and Procedures Manual (PPM) for the legal entity and any of its employees ($a lot);
3) Hiring of an auditor for the management company ($7-10,000/yr);
4) Setting up a trust or LP for the investment fund ($5,000);
5) Producing an Offering Memorandum ($15-25,000?); and
6) Hiring administrators, auditors, compliance consultants, and legal advisors to help with the ongoing admin/compliance of the investment fund (other than the administrators & auditors, which charge the fund directly, probably $10,000/yr).

If you get past all this and you want to charge an absolute hurdle (6%) performance fee, your investment fund will need to be a non-reporting issuer fund (Prospectus funds can only charge fixed fees (% of assets) or hurdle rates based on a reasonable benchmark (i.e. S&P500 TR Index)). This means that your fund will only be accessible to "accredited investors." Accredited investors have a minimum annual income requirement, or minimum liquid investment funds, or minimum asset size, etc., etc. The market for such investors is small and competitive.

As longlake95 suggests, it is daunting but not impossible and, if successful, worthwhile.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: ValuePadawan on November 29, 2019, 10:20:10 AM
Being remunerated for managing other people's capital (advising, in regulatory parlance) has regulatory implications. The first being licensing. You must become licensed as a portfolio manager or investment fund manager. In order to be licensed, certain prerequisites are essential: experience and education. Education is typically earned through the CFA Institute exams and eventual charter. In order to get a CFA charter, a minimum of 3 years' worth of relevant investment analysis/management work is required. The regulators will expect some, if not all, of this to be realized prior to considering granting a license. Meaning, you may have to work for another registered firm prior to setting up on your own.

The operating expenses are only somewhat onerous and mainly comprise:

1) Setting up of a management company (licensing requires a legal entity) ($500 setup and then ongoing registration fees with the regulator of at least $1,100/yr - depending on entity revenues);
2) Production of a Policies and Procedures Manual (PPM) for the legal entity and any of its employees ($a lot);
3) Hiring of an auditor for the management company ($7-10,000/yr);
4) Setting up a trust or LP for the investment fund ($5,000);
5) Producing an Offering Memorandum ($15-25,000?); and
6) Hiring administrators, auditors, compliance consultants, and legal advisors to help with the ongoing admin/compliance of the investment fund (other than the administrators & auditors, which charge the fund directly, probably $10,000/yr).

If you get past all this and you want to charge an absolute hurdle (6%) performance fee, your investment fund will need to be a non-reporting issuer fund (Prospectus funds can only charge fixed fees (% of assets) or hurdle rates based on a reasonable benchmark (i.e. S&P500 TR Index)). This means that your fund will only be accessible to "accredited investors." Accredited investors have a minimum annual income requirement, or minimum liquid investment funds, or minimum asset size, etc., etc. The market for such investors is small and competitive.

As longlake95 suggests, it is daunting but not impossible and, if successful, worthwhile.

This seems like an awful lot to do just to manage a majority portion of one close family member's capital. Would a more informal arrangement of me managing their brokerage account and then calculating any fees once a year be a better alternative? Would them wiring me fees at the end of the year cause me tax issues?
Title: Re: Pabrai/Buffett partnership fee structure
Post by: longlake95 on November 29, 2019, 10:23:44 AM
bad idea, if you accept fees, you are in business - therefore you must register. You should consult a securities lawyer for more information.
LL
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Gregmal on November 29, 2019, 10:34:23 AM
I don't know how it is in Canada(frankly it sounds like a fucking nightmare) but one of the main reasons I haven't moved to an outright fund structure(Im in the US) is all the crap that is required in regards to regulatory, legal, audit, etc; that for a small shop, is an outright burden and waste of time.

Why deal with that when you can just run SMA's or even, worst case, just management funds for someone in an unofficial capacity? It sounds like the person who wants you to manage their funds admires your ability. It also sounds like there is an element of trust. So the easiest path IMO(with those things assumed to be accurate) is to just have him cut you a check to cover first year costs and fees. Then manage the account which would already be setup in his name. And then just settle up on a quarterly/semi annual basis.

Set up an LLC and call it a consulting business. Then you can even start tallying official business expenses as well. Many ways to get around the bullshit
Title: Re: Pabrai/Buffett partnership fee structure
Post by: returnonmycapital on November 29, 2019, 10:40:40 AM
I don't know this for sure but I don't think there is anything wrong with managing a family member's brokerage account as a "trading authority." But as LL writes, as soon as you take remuneration, you are deemed a professional, an adviser and therefore subject to regulation/registration requirements.

It doesn't matter what kind of way you manage (through a fund or SMAs), it is the taking money for it that counts. I'm not even sure you could manage a fund at zero fees without being registered as you might have arm's length investors in the fund (i.e. non family). I imagine that the regulators wouldn't allow you to manage money for arm's length investors without registration, even at zero remuneration.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: longlake95 on November 29, 2019, 10:50:10 AM
sure, you can manage your rich Uncle's account, your wife's account and your neighbors account for free. But, in Ontario, and Canada generally, once you are: " in the business of trading, advising and dealing in securities" you need to register. Full stop. Consult a securities lawyer.

LL
Title: Re: Pabrai/Buffett partnership fee structure
Post by: ValuePadawan on November 29, 2019, 12:05:49 PM
Ya I have an appointment with a lawyer relatively soon thanks for the info I'll be sure to ask about all this with them and make sure I stay well within the legal lines. I appreciate it so much!
Title: Re: Pabrai/Buffett partnership fee structure
Post by: longlake95 on November 29, 2019, 01:26:12 PM
if you get a different answer, i'd be happy to hear what your lawyer says.

LL
Title: Re: Pabrai/Buffett partnership fee structure
Post by: Cardboard on November 30, 2019, 07:25:00 AM
The lawyers will always tell you to protect yourself to the nth degree and run you a huge bill in the process. This entire thing is claimed to prevent investment fraud and it does but, I guarantee you that the largest outcome is to protect so called portfolio managers and their 6 figure salaries.

I would setup a corporation or a general or a limited partnership between the two of you with a good contract. If there is no complaint you will never hear from regulatory people. Think about it. How many people do that for real estate or other business where there is a money contributor and a manager being compensated for his or her work?

It is all about the relationship between the two of you or what happens if things go wrong investment wise, various disrupting life events, etc. and please don't underestimate that possibility.

Cardboard
Title: Re: Pabrai/Buffett partnership fee structure
Post by: mcliu on November 30, 2019, 08:56:08 AM
The lawyers will always tell you to protect yourself to the nth degree and run you a huge bill in the process. This entire thing is claimed to prevent investment fraud and it does but, I guarantee you that the largest outcome is to protect so called portfolio managers and their 6 figure salaries.

I would setup a corporation or a general or a limited partnership between the two of you with a good contract. If there is no complaint you will never hear from regulatory people. Think about it. How many people do that for real estate or other business where there is a money contributor and a manager being compensated for his or her work?

It is all about the relationship between the two of you or what happens if things go wrong investment wise, various disrupting life events, etc. and please don't underestimate that possibility.

Cardboard

It's pretty insane how big the regulatory differences are between managing an investment pool and managing a real estate corporation/private-mortgage lender.

One issue with a corporation may be the higher taxation of passive income, especially from the foreign interest/dividends.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: gurpaul88 on November 30, 2019, 12:03:00 PM
sure, you can manage your rich Uncle's account, your wife's account and your neighbors account for free. But, in Ontario, and Canada generally, once you are: " in the business of trading, advising and dealing in securities" you need to register. Full stop. Consult a securities lawyer.

LL

This.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: investmd on December 02, 2019, 06:12:09 AM
Ya I have an appointment with a lawyer relatively soon thanks for the info I'll be sure to ask about all this with them and make sure I stay well within the legal lines. I appreciate it so much!
ValuePadawan, once you've seen a securities lawyer, please do update this post - would like to know outcome of discussion. Thanks
Title: Re: Pabrai/Buffett partnership fee structure
Post by: ValuePadawan on January 14, 2020, 02:25:47 PM
Ya I have an appointment with a lawyer relatively soon thanks for the info I'll be sure to ask about all this with them and make sure I stay well within the legal lines. I appreciate it so much!
ValuePadawan, once you've seen a securities lawyer, please do update this post - would like to know outcome of discussion. Thanks

So I spoke with a lawyer and they recommended since it is just investing for the one family member, I draw up a simple contract outlining performance fees to be calculated once a year and charge them an advisory fee based on that. Seems like the simplest idea won out and I'm going to get that done in the coming weeks and start managing some of their money.
Title: Re: Pabrai/Buffett partnership fee structure
Post by: oakwood42 on January 17, 2020, 10:28:45 AM
Quote
Do you care to share your results over this period?

My information is all public. You can find anything you need with Google.

great website!
Title: Re: Pabrai/Buffett partnership fee structure
Post by: oakwood42 on January 17, 2020, 06:17:46 PM
Ya I have an appointment with a lawyer relatively soon thanks for the info I'll be sure to ask about all this with them and make sure I stay well within the legal lines. I appreciate it so much!
ValuePadawan, once you've seen a securities lawyer, please do update this post - would like to know outcome of discussion. Thanks

So I spoke with a lawyer and they recommended since it is just investing for the one family member, I draw up a simple contract outlining performance fees to be calculated once a year and charge them an advisory fee based on that. Seems like the simplest idea won out and I'm going to get that done in the coming weeks and start managing some of their money.

Thanks for the update ValuePadawan.