How much should I charge the clients?

[trend2009]

I would like to start a small hedge fund which have some investors. the investors are mainly friends and family members. I know the standard fee structure in this industry is 2% for management fee, and 20% for high water performance fee. But in my case, since the investors are friends and family members, I would not like to sour the relationship in case of losses; on the other hand, they can not afford to lose much of their savings. As such, I would propose a reimbursement-based fee structure.

1) I will reimburse 50% of there loss.no management fee. how much should I charge for performance fee?
2) I will guarantee 5% return annually. no management fee. how much should I charge for performance fee?

many thanks.

 

[the1]

Is your fund a registered fund or exempt? If it's registered and you are trading for non-qualified investors you are prohibited from charging them a performance fee. If you are exempt then you are also exempt from that rule. I'm not a lawyer, just a guy who used to manage a hedge fund.

 

[trend2009]

Quote from the1:

Is your fund a registered fund or exempt? If it's registered and you are trading for non-qualified investors you are prohibited from charging them a performance fee. If you are exempt then you are also exempt from that rule. I'm not a lawyer, just a guy who used to manage a hedge fund.

the fund is not registered. it is more like a pool with private agreement between me and the investors. no more than 15 investors in the fund.

 

[the1]

Then I would charge 20% and skip the management fee. You shouldn't guarantee a 5% annual return. Your investors should be fully aware of the risks involved in investing in such a fund and be ready, willing and able to accept 100% of the losses. I understand the friends and family problem you have. The only F&F I allowed in my fund was my Father and I tried to talk him out of it. I was asked by many friends and I flat out refused to accept them as investors but you gotta start somewhere. I had enough contacts in the biz so I didn't have to go the F&F route. Best of luck!

Quote from trend2009:

the fund is not registered. it is more like a pool with private agreement between me and the investors. no more than 15 investors in the fund.

 

[Lucias]

Dunno why you would even think of this. If you aren't registered then you won't be able to use that to build a track record. This sounds like a terrible idea all around. The fact you could even have such bad ideas is a warning.

Quote from trend2009:

I would like to start a small hedge fund which have some investors. the investors are mainly friends and family members. I know the standard fee structure in this industry is 2% for management fee, and 20% for high water performance fee. But in my case, since the investors are friends and family members, I would not like to sour the relationship in case of losses; on the other hand, they can not afford to lose much of their savings. As such, I would propose a reimbursement-based fee structure.

1) I will reimburse 50% of there loss.no management fee. how much should I charge for performance fee?
2) I will guarantee 5% return annually. no management fee. how much should I charge for performance fee?

many thanks.

 

[trend2009]

I am just looking to help those relatives and friends. in fact, I have enough of my own capital to play with.

Quote from Lucias:

Dunno why you would even think of this. If you aren't registered then you won't be able to use that to build a track record. This sounds like a terrible idea all around. The fact you could even have such bad ideas is a warning.

 

[trend2009]

Even if I make them aware of the risk, but few of them would really think about the possibilities of losing all their savings. what they have seen if that I make money consistently for the last 5 years even without a losing month.

by in reality, if I lose their money, and i do not reimburse them, they would hate me regardless whether I have warned them of the worst scenario.

on the other hand, they actually do not have too much money to invest, maybe 50k for each, which it is not a big deal for me to reimburse them; but that 50k is almost all their savings for their lives.

I just want to help them, but only in a term fair to me and them.

Quote from the1:

Then I would charge 20% and skip the management fee. You shouldn't guarantee a 5% annual return. Your investors should be fully aware of the risks involved in investing in such a fund and be ready, willing and able to accept 100% of the losses. I understand the friends and family problem you have. The only F&F I allowed in my fund was my Father and I tried to talk him out of it. I was asked by many friends and I flat out refused to accept them as investors but you gotta start somewhere. I had enough contacts in the biz so I didn't have to go the F&F route. Best of luck!

 

[the1]

Whoa Trend! I hope they are not investing "all their savings." Your words. The first question I ask when interviewing a new client is what % of their total net worth will be invested. Trading futures is so risky I would not recommend you take more than 10% of any one person's free cash flow. A flash crash while you are nicely leveraged long and you can be wiped out in a matter of minutes. I've been doing this a while and I can tell you 95% of the people really don't understand the risks even though they say and sign that they do. When you tell them they can lose more than their initial investment they discount it as an event that is basically impossible. Thankfully, that has never happened to me but it doesn't mean it won't or can't. I've taken my share of ass kickings and I know I'm one trade away from owing the broker. A crude trade a few years back reminded me of that. I have the chart hanging on my wall to remind me each and every day.

And you're right about your F&F hating you, with fair warning or not. Money destroys relationships, which is precisely the reason I won't trade for F&F.

Quote from trend2009:

Even if I make them aware of the risk, but few of them would really think about the possibilities of losing all their savings. what they have seen if that I make money consistently for the last 5 years even without a losing month.

by in reality, if I lose their money, and i do not reimburse them, they would hate me regardless whether I have warned them of the worst scenario.

on the other hand, they actually do not have too much money to invest, maybe 50k for each, which it is not a big deal for me to reimburse them; but that 50k is almost all their savings for their lives.

I just want to help them, but only in a term fair to me and them.

 

[trend2009]

it is so true. I only wish to help them, but would not give them free money. I can bear all their loss, also I wish to charge for the performance.

i can reimburse them on the basis they do not have more than 50k to invest. if they are rich, i do not need to help them.

only question is the fair charge of the performance when they have no risk of the initial capital.

I remember at the early stage of warren buffet, he also managed relative's money, and he guaranteed them 5% return per year, but charged them 50% of performance fee. is that right?

i know in the financial efficient market, any such guarantee of no risk will only generate returns no more than bank interest.

Quote from the1:

Whoa Trend! I hope they are not investing "all their savings." Your words. The first question I ask when interviewing a new client is what % of their total net worth will be invested. Trading futures is so risky I would not recommend you take more than 10% of any one person's free cash flow. A flash crash while you are nicely leveraged long and you can be wiped out in a matter of minutes. I've been doing this a while and I can tell you 95% of the people really don't understand the risks even though they say and sign that they do. When you tell them they can lose more than their initial investment they discount it as an event that is basically impossible. Thankfully, that has never happened to me but it doesn't mean it won't or can't. I've taken my share of ass kickings and I know I'm one trade away from owing the broker. A crude trade a few years back reminded me of that. I have the chart hanging on my wall to remind me each and every day.

And you're right about your F&F hating you, with fair warning or not. Money destroys relationships, which is precisely the reason I won't trade for F&F.

 

[trendo]

Quote from trend2009:

I can bear all their loss,

they have no risk of the initial capital.

Not to nitpick, but in your first post you said that you would reimburse them for only half their loss.