how should profit be divided between these two partners ?

Discussion in 'Trading' started by jjk2, Feb 23, 2008.

  1. jjk2


    imagine a small limited partnership, in which the two partners are in management of assets under 20million , investing in various public equities.

    how should the performance fee be divided amongst one partner which is completly in charge of managing the investments, and another partner which soley focuses on raising, and acquiring new capital??
  2. 50/50 then later down the line the partner managing the investments if successful should start his own fund and take all clients.
  3. 20/25% of fees generated is standard for hedgie capital raising.

  4. Although Youth's suggestion sounds callous it may very well happen, and that is why carefully written contracts are essential. I have dealt with situations like this in the past. You cannot have a successful fund without finding capital and making those investors happy, as well as achieving profitable trading. As to Surf's point, there is a significant difference between finding capital once, and someone who is an ongoing partner in the business who is constantly looking for new funds and actively works at keeping the current investors happy. If you think keeping fund investors happy is just a matter of returns and nothing else, then you would be incorrect.

    Most traders vastly underestimate the difficulty in raising capital and handholding investors, while most salesmen vastly underestimate the difficulty in achieving consistently positive risk adjusted returns. They may never agree which is more important, and depending on the specifics of the actual fund one partner may be more significant in one case while the other partner is more important given different circumstances.

    Assuming both partners are actively involved in running the business everyday, the fair way to do it is 50/50. Then have a talented lawyer (surprisingly hard to find in my experience) write a contract where if one partner wants to buy out the other they have to offer an amount that can be used by the other partner to buy him out. In other words, if partner A offers to buy out partner B for $1M then partner B has the right to say no thanks I will buy you out at that price. This hopefully insures the buyout offer will be a reasonable price.
  5. jjk2


    i thought that the partner involved with investments should be compensated more....

    also 50/50 wouldn't make much sense for a guy bringing in diminishing amount of capital to the fund. one partner would be working his ass off finding investig and trading while the other partners not doing the job very well.

    as well as theres fluctuations b/t the two. one partner may not be efficient at a given time, and both might run into arguments.
  6. There would be no fund without someone going out meeting investors and shopping around the fund to the wealthy. Think what you may but with out this type of work there would be no real way to start and raise a fund. When getting started its more about who you know that what you know.