How to start investment partnership like Buffett Partnership

Here is early buffett partnership fee structure – it seems like Buffett was/is very confident in his investment skills because he GUARANTEED 4% return yearly

10/21/2019 – How can I start my own investment fund like Warren Buffett’s first fund?

First off, you’re not a peon.

I believe you could start a “hedge fund” using an LLC as a vehicle. My understanding is that as long as you have less than 100 investors, the regulation is pretty low.

Using an LLC, people could buy into the fund/company and then you could invest the money/capital they contribute. If you set up the LLC as manager-led, then you would have the right and distinction to manage the LLC/capital.

This would be different from a typical fund in that people would technically not just be contributors/clients, but owners with authority.

This could be a way to get started, I know people who have successfully done this. I’d reccommend talking through with a lawyer in your state first.

Note: I am not a legal professional.

You are wading into a highly regulated market (securities law regulations, generally speaking), and with those regulations comes very expensive lawyers and lots of paperwork.

Your initial step should be to find a highly qualified and very experienced securities lawyer (read: expensive) who can outline for you the process to get you from your present state to the state where you can solicit other people for money to manage on their behalf. Make sure this attorney gives you a cost estimate, too, for both his (and his associates’) labor, as well as regulatory filings, accounting fees, etc.

Finally, consider that even once you have all that documentation in place, why would anyone invest in you? What’s your track record?

10/21/2019 – Topic: Pabrai/Buffett partnership fee structure (Read 57914 times)

It seems like the fee structure changed later and became different than that of year 1956 and 1958

10/21/2019 – What was the fee structure of Warren Buffett’s first investment partnership started in 1956?

Buffett Associates, Ltd., started on May 1, 1956, with seven limited partners, all of whom were close family and friends, began with $105,000 not including a $100 contribution from the general partner, Warren Buffett. A replication of the original Certificate of Limited Partnership is shown below.[1] Note, subsequent investment partnerships had different terms, but these were the terms of the very first partnership.

The fee structure was originally structured as follows:

There was no management fee. In fact, there was actually the opposite. The initial investors, the limited partners, were paid interest of 4%, which would be “charged as expenses of the partnership business”.
Each limited partner would “be paid interest at the rate of 4%” on whatever balance his or her capital account showed on December 31st of the prior year. (Because the partnership began in the middle of the year in 1956, an adjusted 2% would be paid on December 31, 1956 based on the original contribution amount.)
With regards to the performance fee for the general partner, each of the seven limited partners would get their pro-rata share of 21/42 or 50% of any net profits and the other 21/42 or 50% of net profits would go to the general partner, Buffett.
My interpretation of this is that if the investment partnership performed below 4% during a given year based on the limited partner’s previous year-end capital balance, Buffett was on the hook to fund any shortfall to meet that 4% interest payment to that limited partner. Whether the interest payments could fall into arrears or be deferred is unclear.
I think this is how the compensation structure originally worked in various scenarios:
- If the fund returned 4%, Buffett would get 0%. 4% would go to funding the interest payment to limited partners.
- If the fund returned 10%, then 4% of that would go to funding the interest payment to limited partners and the remaining 6% would be split 50/50 between the limited partners and Buffett.
- If the fund returned 2%, then Buffett would have to come up with the 2% shortfall to meet the required 4% interest payment.
- If the fund returned 0%, then Buffett would have to come up with the 4% shortfall to meet the required 4% interest payment.
- If the fund was down 40%, then Buffett would have to fund 4% of that loss and the limited partners would be down 36% on a net basis.
Picture: A replication of the Certificate of Limited Partnership from 1956. Full document below.[1]
The fee structure was then amended two years later in April 1, 1958, such that Buffett would take 25% of the downside. Regarding this structure Buffett once said, “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.”[2]
- Under this amended structure, I think the above scenarios would have worked like this:
  - If the fund returned 4%, Buffett would get 0%. 4% would go to funding the interest payment to limited partners.
  - If the fund returned 10%, then 4% of that would go to funding the interest payment to limited partners and the remaining 6% would be split 50/50 between the limited partners and Buffett.
  - If the fund returned 2%, then Buffett would have to come up with 25% of the 2% shortfall to meet the required 4% interest payment, so 0.5% would be paid by Buffett and the remaining 1.5% “paid” or absorbed by the limited partners. The limited partners would ultimately get 2.5%.
  - If the fund returned 0%, then Buffett would have to come up with 25% of the 4% shortfall to meet the required 4% interest payment. So Buffett would pay the limited partners 1% and 3% would be “paid” or absorbed by the limited partners.
  - If the fund was down 40%, then Buffett would have to fund 25% of 44% (40%+4% interest) or 11%, and the limited partners would be down 33% below 4% or down 29% on a net basis.

I am wondering if the 1958 amendment changed the 4% interest payment into a 4% hurdle, such that Buffett would only be on the hook for paying 25% of negative returns below zero. In this case, if the fund returned 2%, Buffett would not be on the hook for anything; if the fund was down 40%, then Buffett would cover 25% of that by chipping in 10%, to leave the limited partners with a net negative 30% return.

However, what’s interesting is that he states, “So if I broke even, I lost money.” So this seems to suggest that if he broke even, returning 0% for the fund, he still had to pay up, which leads me to believe that he still had to pay 25% of the 4% threshold shortfall when breaking “even”, suffering a loss of 1%.

[1] Mary Buffett and David Clark, Buffettology (New York, New York: Fireside, 1997), p. 280-283.
Note: The error of Roman numeral “IV” being reported as “VI” is per the presentation of the agreement in the book.

[2] Alice Schroeder, Snowball (New York, New York: Bantam Books, 2009), p. 179-180.

Full document [1]:

10/20/2019 – What was the fee structure of Warren Buffett’s first investment partnership started in 1956?

Noh-Joon Choo, Berkshire Hathaway & Warren Buffett SME

Answered Mar 18, 2015

Buffett Associates, Ltd., started on May 1, 1956, with seven limited partners, all of whom were close family and friends, began with $105,000 not including a $100 contribution from the general partner, Warren Buffett. A replication of the original Certificate of Limited Partnership is shown below.[1] Note, subsequent investment partnerships had different terms, but these were the terms of the very first partnership.

The fee structure was originally structured as follows:

There was no management fee. In fact, there was actually the opposite. The initial investors, the limited partners, were paid 4%, which would be “charged as expenses of the partnership business”.
Each limited partner would “be paid interest at the rate of 4%” on whatever balance his or her capital account showed on December 31st of the prior year. (Because the partnership began in the middle of the year in 1956, an adjusted 2% would be paid on December 31, 1956 based on the original contribution amount.)
With regards to the performance fee for the general partner, each of the seven limited partners would get their pro-rata share of 21/42 or 50% of any net profits and the other 21/42 or 50% of net profits would go to the general partner, Buffett.

My interpretation of this is that if the investment partnership performed below 4% during a given year based on the limited partner’s previous year-end capital balance, Buffett was on the hook to fund any shortfall to meet that 4% interest payment to that limited partner. Whether the interest payments could fall into arrears or be deferred is unclear.
I think this is how the compensation structure originally worked in various scenarios:
- If the fund returned 4%, Buffett would get 0%. 4% would go to funding the interest payment to limited partners.
- If the fund returned 10%, then 4% of that would go to funding the interest payment to limited partners and the remaining 6% would be split 50/50 between the limited partners and Buffett.
- If the fund returned 2%, then Buffett would have to come up with the 2% shortfall to meet the required 4% interest payment.
- If the fund returned 0%, then Buffett would have to come up with the 4% shortfall to meet the required 4% interest payment.
- If the fund was down 40%, then Buffett would have to fund 4% of that loss and the limited partners would be down 36% on a net basis.

The fee structure was then amended two years later in April 1, 1958, such that Buffett would take 25% of the downside. Regarding this structure Buffett once said, “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.”[2]

Under this amended structure, I think the above scenarios would have worked like this:
- If the fund returned 4%, Buffett would get 0%. 4% would go to funding the interest payment to limited partners.
- If the fund returned 10%, then 4% of that would go to funding the interest payment to limited partners and the remaining 6% would be split 50/50 between the limited partners and Buffett.
- If the fund returned 2%, then Buffett would have to come up with 25% of the 2% shortfall to meet the required 4% interest payment, so 0.5% would be paid by Buffett and the remaining 1.5% “paid” or absorbed by the limited partners. The limited partners would ultimately get 2.5%.
- If the fund returned 0%, then Buffett would have to come up with 25% of the 4% shortfall to meet the required 4% interest payment. So Buffett would pay the limited partners 1% and 3% would be “paid” or absorbed by the limited partners.
- If the fund was down 40%, then Buffett would have to fund 25% of 44% (40%+4% interest) or 11% and the limited partners would be down 33% below 4% or down 29% on a net basis.