shan
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Posts posted by shan
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This year, Prem Watsa said that Fairfax is 100% hedged and that he's afraid of a repeat of 1930s style recession. His main point was that 1929 stock market crash was lot smaller than the bigger drop which came in 1933-34. So he's sticking to hedging, even if it leads to big losses. His words - "we'll be wrong a couple of times, but when we're right, it will make up for it".
I am convinced that the market is overvalued because:
1. I cannot find many undervalued opportunities.
2. Prem Watsa said in 2014 Annual report and shareholders meeting that more things can go wrong than right. For example, the fed induced low interest rate is pushing all asset prices high, China has massive housing bubble, Europe in going into a triple dip recession (atleast Italy) etc.
So I wanted to ask what methods are the members of this forum using for hedging. Some of my ideas have been:
1. Basket of shorts for tech overvalued stocks (I am from tech and based in Silicon valley, and I think its crazy overvalued)
2. SPY puts
3. What is Fairfax using for hedges?
4. Stay in cash (as dry gun powder?)
I'd like if we could discuss more ideas and their pros and cons.
Thanks,
Shan
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I think I found most of the answers here - http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171487308#.Ut4WU2TTk10
This sucks for people who didn't start their fund before 2012 :(
It says cannot charge performance fees to clients other than "qualified clients". So charging management fee (1-2%) is allowed?
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This is what I didn't fully understand until I started the fund. You are right about the accredited investor requirements. However, in order to charge performance fees, the LP has to also be a qualified client with the minimum asset requirements that I listed. So, for example, I have 10 investors. Three of them are qualified clients (assets of at least $2m or at least $1m in the fund). I can charge them performance/incentive fees. Eight of them are accredited investors. As a 3©1 fund I can have up to 35 non-accredited investors in the fund, so no problem on the two who are not accredited (other than higher liability potential from them). But, I cannot charge performance fees to the seven investors who are not qualified clients.
The qualified client levels for sub $100m (I believe) funds are defined by the state rules, which are different across states. However, there is a model law movement to revise the standards in the states to match the SEC definition. Many states have done this already, and others are following suit. For all the states I've looked at who have not adopted the $2m threshold, they still have an old $1.5m level.
For 3©(7) funds, I believe all of the LPs must be qualified clients.
I don't fully understand this yet.
1. Do you where the requirement for performance fees to be applied to only qualified clients is given? Is that part of 506 code?
2. Also did you try to register as an exempt registered investment advisor? For example, California allows exempt registered investment advisor criteria to be the same as SEC. See section "New Exemptions" here - http://www.reedsmith.com/New-California-Exemption-for-Investment-Advisers-to-Private-Funds-09-19-2012/
3. Can you clarify what you mean by the $2M threshold?
4. If you don't get exemption from state, it only means that you have to be a registered investment adviser there. Why does it affect the charging of performance fees?
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As much as I like the Pabrai/Buffett incentive fee structure, there is a big piece unmentioned that makes it unworkable for small funds raising money from friends and family. In fact I did not even realize this when I started my fund in 2012. In order to charge performance fees in the U.S., a limited partner must be a qualified client. States have different rules on what asset size they must meet, but more states are adopting the new federal standard, which is $2 million not counting the value of the primary residence, or $1 million invested in the fund. This can be a huge problem if you choose to not take a management fee. For example, I currently have 10 limited partners, but only three of them are qualified clients.
This was a problem (for the general partner, at least) that didn't exist when Buffett had his fund. Additionally, when Pabrai launched his fund, the requirement was much lower. I believe it was the same as the accredited investor standard back then.
So, if your friends and family aren't qualified clients, and you choose the Pabrai/Buffett fee structure, you're going to be working for free whether you like or not until you can either get the investors up to that standard with the fund's performance, or you attract wealthier clients.
This is the sad part of these regulations, where in the name of protection, it reduces the ability of funds to bootstrap. At least for those who don't have wealthy friends and family. Though, clearly from the examples on this thread, many have powered through and done it anyway, whether they are rightly compensated for it in the beginning or not. I commend those of you that have done this, but it would be very difficult to do without an understanding spouse or some other income stream.
I checked the requirements on SEC recently and it seems that you are mentioning a 3©(7) fund. For a 3©(7), the requirement is qualified clients and the number of client is now 1999 (used to be 499).
But you can still do a 3©(1) fund with upto 99 accredited investors. The accredited definition is now 1M assets without residence or 200K per year income. In fact, you can have 35 non-accredited investors but then you cannot advertise freely as allowed by JOBS act.
Info with quick summary is here - http://online.barrons.com/article/SB50001424053111903591504577361903353035884.html and you can check SEC webpages for Dodd-Frank and JOBS act updates which will confirm the Barron's article.
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Great discussion!
It will be great if someone could share what they do for tax accounting for the client's gains/losses in their funds?
I am planning to start my fund (limited partnership with GP as LLC) with Buffett/Pabrai style 6/20 fee structure. I am currently struggling with understanding how to account for the taxes for different clients. I saw that some big funds maintain two types of book-keeping accounts for each client - 1.capital account (takes into account additions, withdrawals) , 2. Tax capital account (capital account + gains - losses)
PS: I am aware about the K-1 tax filing requirements, my question is more towards book-keeping for client taxes.
Thanks,
Shan
How to value non-producing acreage for E&P companies
in General Discussion
Posted
While trying to value E&P companies, one of the challenges is how to value non-producing acreage, and I've been putting E&P companies into "too-hard-to-value" pile due to this challenge.
What are some of the ways you've seen non-producing acreage being valued? I understand that this valuation might have wide range given the wide swings in shale gas spot prices and forward curves.
For producing acreage, value can be based on future cash flows.
But non-producing acreage presents lot more challenges:
1. Its a bit like non-income producing real estate / land holding - where there are no current cash flows that can be used to value it.
While this acreage can be sold, the price for sale is highly influenced by current gas prices. So the most recent sale prices might not be a good indicator. Also, contiguous acreage might be valuable to a buyer.
2. To get to production state, lot of capital is needed for drilling and completion of wells. But the company might not have easy access to capital when natural gas prices crater.
3. The company also has to rely on build up of takeaway capacity i.e. pipelines to be built.