Warren Buffett’s Original Money Management Fee Structure
Here’s a another little fact from The Snowball that I found interesting. When Warren Buffett set up his first investing partnerships where he agreed to manage other people’s money, he wanted a compensation agreement that was fair and equitable.
I got half the upside above a four percent threshold, and I took a quarter of the downside myself. So if I broke even, I lost money. And my obligation to pay back losses was not limited to my capital. It was unlimited.
The last part meant he could lose more money than he put actually invested into the partnership. He would cover a quarter of all losses from his partners, even if it meant selling his house or other assets. Now that is what I call a true alignment of interests.
Sure, half of the upside past 4% is a lot, but can you imagine any modern hedge fund agreeing to such a fee structure that would expose them to losses? Nope, they get “2+20″, which means 2% of assets no matter what plus 20% of profits, which really encourages them to just swing for the fences. If they implode (which many did recently), they simply pack up and open a new fund down the street.
It’s hard enough these days to find a mutual fund manager where a substantial part of their net worth is invested in the fund they manage.
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May 30th, 2009 at 3:37 pm
It looks like Buffett’s fee structure is more friendly to the participants. Much better than most hedge fund managers.
May 30th, 2009 at 5:18 pm
Show how confidant he is in his investing ability and that his strategy is definitely designed to provide long term value, not short term profits for managers.
May 31st, 2009 at 9:12 am
Just another reason that he is just an admirable guy. Wish there were more fund structured like this today!
May 31st, 2009 at 2:41 pm
Hi Jonathan,
This is totally off topic for this thread, but appropriate for your blog.
I stumbled upon an amazing video in google that I can recommend to you.
Go to google video, and search on “Money as Debt”. I really think it is an excellently produced educational video.
regards
June 1st, 2009 at 10:03 pm
sounds like Buffett was trading futures w/ huge leverage, but he is a great man w/ integrity. he is one of a few CEOs w/ small paychecks – he only makes $100k in 2008, but cares alot about his company. How many CEOs out there do really care about their companies? Are willing to receive much smaller paychecks than they do now? Most of them care more about their personal wealth than company’s success!
June 3rd, 2009 at 4:25 am
Actually the first Buffett partnerships were combined into a single one in the early 1960s. Each of those partnerships had different fee schedules. I am not sure about the losses, but after reading one of the first letters to partners from the 1960s it appears that he didn’t make any management fees until the partnership made 6%, after which he received 25% of the amount above 6%:
http://www.ticonline.com/buffe......07.22.pdf
Buffett could afford to get small fees, as he owned 1/6th of the original Berkshire Partnership. He was also able to purchase stock in Bekrshire Hathaway in the process, through the partnership as well.
I do admire a CEO of a company that has the majority of his/her wealth in their company’s stock. These executives are much more likely to allign their best interests with the best interests of their shareholders.
September 6th, 2009 at 7:05 am
Our firm manages a hedge fund where we participate in 50% of the upside but unlimited guarantee against 100% of any loss. We took Buffett’s incentive plan a step up.
May 8th, 2012 at 11:50 am
@Joe. What firm/fund is that?