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.

Comments

  1. It looks like Buffett’s fee structure is more friendly to the participants. Much better than most hedge fund managers.

  2. TStrump says:

    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.

  3. Just another reason that he is just an admirable guy. Wish there were more fund structured like this today!

  4. Mississippi Mike says:

    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

  5. 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!

  6. 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.

  7. 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.

  8. @Joe. What firm/fund is that?

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