An Attempt By a Foreign Author to Misrepresent Mr. Buffett's Hedge Fund Results!

[Guest ValueCarl]

With a few of you younger hedge fund managers who dwell on this board, ones who have in many respects replicated The Original Buffett Partnership, a fund with a high water bench mark inuring to your partners' best interests, prior to you tipping your toes in the water, it never ceases to amaze me how misleading one can be, when they don't know what the hell they are talking about or refuse to do better homework!

 

Mr. Cowie would be wise to point out to his readers how "Mr. Buffett's" original hedge fund really operated!  >:(

 

“However, if instead of running Berkshire Hathaway as a company in which he co-invests with you, Buffett had set it up as a hedge fund and charged 2 per cent of the value of the funds as an annual fee plus 20 per cent of any gains, of that $4.8m, $4.4m would belong to him as manager and only $400,000 would belong to you, the investor. And this is the result you would get if your hedge fund manager had equalled Warren Buffett’s performance. Believe me, he or she won’t.

“Two and twenty does not work. That does not mean that 1.5 per cent and 15 per cent is OK, or even 1 per cent and 10 per cent. Performance fees do not work. They extract too much of the return and encourage risky behaviour.”

 

http://blogs.telegraph.co.uk/finance/ianmcowie/100007842/warren-buffett-fund-illustrates-rip-off-management-charges/ 

 

 

[Parsad]

Hi Carl,

 

You are correct…Cowie’s example is a generalization.  Buffett’s original partnership, identical to ours, had a 6% hurdle that he had to surpass before achieving any incentive fee.  Buffett also did not have any management fee.  So if Buffett did well, he was paid well…if he did average, he got less than average compensation for the industry…and if he did poorly, he did not get paid at all.  His incentives were aligned with his partners.

 

Buffett within his partnership did better than any other investment manager at the time.  He did not reap a 1% or 2% fee while sitting on his butt.  The comparison to Berkshire Hathaway is also silly.  One is a partnership structure, while the other is a corporation.  The partners could pull their capital at any time on Buffett within the partnership, whereas the shareholders can never do that.  It is a huge advantage!

 

I can’t wait to see Smith’s fund, expenses and returns.  For some reason, I expect it to be overwhelmingly unsatisfactory.  Cheers!

 

[Guest]

Sanjeev,

 

Correct me if I'm wrong, but doesn't Pabrai also use the same structure that you guys use?

[Parsad]

Yup!  He stole it from Buffett and we stole it from Mohnish.  ;D  Cheers!

[Guest ValueCarl]

Yes, when you consider the hurdle at six percent, one which Mr. Buffett nearly fifty years later has suggested that "long term investors" might look forward to even including dividends on a compounding annual basis, it does develop into a great deal of respect by LP's towards their GP's as long as the GP keeps The Master's Rule at the forefront of their minds.

 

Rule 1: Don't lose money

 

Rule 2: Don't forget Rule 1

 

As simple as this sounds to the casual observer from a superficial perspective, this is one tricky business-even more so in the modern era with the advent of high frequency trading(HFT) and computer algorithms being set by certain miscreants controlling these black boxes-where capital allocators do RISK.  :-X  

 

Without a doubt, Mr. Buffett has cautioned how one bad mistake could derail the whole train ride into a train wreck killing all Burlington owners, even!

 

One last note on "The Greatest One of Them All," Mr. Buffett, as well as Mr. Munger while even throwing in Mr. Watsa who can price money expensively from time to time! What might appear to be criticism, even cursing these great prophets at times, is not how I would feel about them running the capital for my own family. The same applies to you, Mr. Parsad!  

 

These men are gifted financial geniuses notwithstanding their remarks to the contrary, and those fortunate enough to have them working their capital for long enough time stretches, have truly been blessed by the great God above.  :D  

 

That is why I always wanted Mr. Buffett to be, "The Treasury Secretary," so all the people of my land could sleep more comfortably!