….Continued

7. “A division of profits between the limited partners and general partner, with the first 6% per year to partners based upon beginning capital at market, and any excess divided one-fourth to the general partner and three-fourths to all partners proportional to their capital. Any deficiencies in earnings below the 6% would be carried forward against future earnings, but would not be carried back.” (1961)
   The Buffett Partnership fee structure is a thing of wonder (albeit only for superior investors). The structure was: zero management fees with a 25% performance fee above a 6% hurdle. This allowed a real partnership to form with a sticky capital base as Warren wouldn’t get paid if he didn’t produce above 6% return. He structured the fees so that he would be under less pressure during the down years- the riskiest time for the limited partners to liquidate their partnership, allowing him to stay invested during lean times and even deploying more capital at the more attractive market prices. Note that this fee structure is gaining more popularity with boutique funds (Mohnish Pabrai, Li Lu) as it truly aligned all parties’ interest. Personally, I use this structure when managing my family’s capital with a high watermark structure. Continue reading →