I was thinking through the attractiveness of a 0/6/25 fee structure that Buffett used in his original partnerships. I wondered if anyone had any examples of what the current performance fees and hurdle rates hedge funds are getting with a 0% management fee?
For the situation I am imagining, this would be more for a different fee structure to offer accredited investors in addition to an existing fund with a traditional management fee plus performance fee. Almost like a second "product wrapper" utilizing the same investment strategy as the main fund but offering a different fee structure. The 0% management fee would not be an issue for firm profitability as the GP economics of the existing fund will finance any losses in the short term for the new fund offering.
Assuming performance is good, (not guaranteed for sure) am I missing anything with these structures? They seem to be fairly attractive for LPs and GPs as interests are directly aligned and could spur additional interest in the fund from LPs looking for absolute returns.
Any thoughts here would be welcomed.
Comments ( 7 )
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You are not going to attract investors because your fees are low. Sophisticated investors care about net performance, period. Element, Renaissance etc charge 40-50% performance fee and they're closed to new capital. Any of us would put money into those funds if allowed, even if the fees were 60%.
Also, to be honest extra low fees suggest desperation, which is not what prospective investors want to see.
I get where you are coming from but the idea is less about charging lower fees and more about shifting the fee from an management fee and performance fee to solely a performance fee. You would get a much higher cut of the P&L to offset the absence of a management fee. Maybe 25% over 6% is not an appropriate rate today. I only mentioned it as it is the classic Buffett fee structure.
I am more curious as to if any firms are doing this and what performance splits they are getting. The idea is finding a fee structure that LPs prefer rather than just lowering the overall fee.
One consideration is that investors want to make sure you can cover your infrastructure costs. Of course they don't want you making money when not performing, but they want to make sure you can pay your CFO , compliance officer, rent, investment team. If you cut too much they will rightly fear about business continuity risk the moment you have a down year. So if you cut mgmt fee to zero, you need to be able to explain how you sustain your business through bad years.
Yes I know some some doing this. Example would be 0/30 and 0/40 but investor pay for the Infra cost.
Seeing startup funds close to 0/40 isn't unusual but most emerging managers are usually advised against it so the fund can cover its expenses.
An incubated fund before converting into a hedge fund is something law firms offer during the establishment phase so the utility of low fees is debatable because if the purpose of low fees is to attract investors this can be done using an incubator model and demonstrating a track record instead.
(Meant to reply to the main post)
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