how to account for illiquid holdings

[ragnarisapirate]

All,

 

This stems from the 2012 returns post.

 

It has been long bothering me as to how to calculate out "gains" in a portfolio when investing in illiquid positions. From my own experience (and I am not trying to talk up the stock, just outlining my own circumstances) SYTE makes up a sizable position in my own and accounts that I manage... Given that I get a performance based fee for the accounts that I manage (of family members), how should I add in gains from things like SYTE or other illiquid holdings? I would hate it if someone placed a market order and bid the price up by a lot on a few dollars worth of stock on the day that fees were calculated.

 

I bring this up, also, because if I were to liquidate my SYTE position tomorrow (which I won't do), I have no idea what would happen to the price: I would think it would go down precipitously, and I would probably lose money on it despite an averaging in well below present prices. Therefore, I don't know that using the market price is the best way to go about calculating things... The same could probably be said of, say, Parsad and ITEX (though, this is a guess).

 

I know at one point, Buffett simply was compensated on an investment based on the increase in book value, but, a lot of my illiquid positions are trading at huge discounts to book, so, that doesn't really seem like a fair way either, as changes in book value (while a decent metric) don't go lock step with intrinsic value.

 

I am sure that I am not the first one of us to run into this. I am hoping for a bunch of opinions as I don't want to screw any one, but at the same time, want to be treated fairly.

[Packer16]

One way some PE funds handle this is to calculate fees on sold illiquid positions.  The other alternative is clawback but that is not as clean.

 

Packer