Pabrai/Buffett partnership fee structure

[skanjete]

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.

[Parsad]

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! 

 

 

 

 

[Palantir]

wow 25k?

[JBird]

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!

[hyten1]

parsad,

 

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

 

hy

[Parsad]

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!   

[Ghost]

Parsad,

 

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

 

[Parsad]

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!

[hyten1]

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! 

[Edward]

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.

[Parsad]

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!

[oddballstocks]

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

[Edward]

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.

 

[Parsad]

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!

[Parsad]

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!

[skanjete]

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.

[returnonmycapital]

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).

 

 

[oddballstocks]

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.

[benhacker]

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.

[Edward]

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).

 

[Tim Eriksen]

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.     

[returnonmycapital]

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.

[oddballstocks]

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.

[Edward]

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 :)

[Tim Eriksen]

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.