I have a few people interested in me trading their accounts in the IB separate managed account structure...sortof like a hedge fund...but in the SMA structure (people are deftly afraid of fraud and liquidity these days...and i suppose i don't blame them). Anyway...assuming i go the IB SMA route...i'm trying to come up with the right performance fee structure. I suggested 10% of first 0-10% 20% of 11-20% 30% of 21-50% 40% of 51%+ In this structure...if i make less than 30% return...then the investor pays lower net fees than if i had charged a flat 20%. Above 30%...the skew moves in favor of the manager (myself)...but is capped at 40% of profits above 50%. Anybody have any thoughts on his?
1) The first 10% of gains ought to have a 0% payout because you can't expect to generate "alpha" at that level. To offer such a "free option" gives you a basis to ask for a larger payout at higher levels of performance. 2) With "smaller" amounts of money under management, the payout needs to be "high", possibly much greater than 40%, to be worthwhile for you. 3) There can be no management fee, unless you're trading a "much larger" account. :eek:
Depending on which state you and the other people are in (if you are in the U.S.) there could be regulations that could limit your ability to receive compensation like that. Make sure you double check all the state laws and regulations regarding investment advisers and/or consult an attorney.
As the OP stated, you need a high water mark. You can use the long term return of the S&P 500 at around 8%. So you earn nothing on the first 8% and 20% after that. I would probably have you shot if you asked for 50% plus. Why would I incentivize you to blow up my account? If anything, I would pay you a lower payout as the returns got higher. But to keep things simple, let's say 0 on the first 10% and 20% for everything above that. And I concur with the OP about checking with your state securities laws. Some states require your investors to be accredited to earn the performance fee meaning you can only charge a management fee. Some states cap the limit at 350k for total non accredited assets. And if these "people" are friends and family who want you to trade their money, decide now how important those relationships are. Because they may not be after this is over.
a "high-water mark" is not as the last poster made it sound. it simply means suppose you got up 30% and charged fees at that point (ie account at 130%) then lose 20% (110) and then make that 20% back you can't charge a new set of fees on that profit (110-130) because you have already charged those fees once. also you don't need to offer "free" early on returns if you are good. i get 50/50 on every 1$ i make.
hey guys, thanks for the responses...these are a few things i hadn't thought of deeply enough from the investor perspective. 1) add a high water mark (goes without saying) 2) add a benchmark hurdle (10%) to justify the risk vs reward profile i asked for feedback because i told my investor that i was just throwing numbers out there and i asked him to come back to me with a structure that made him comfortable. I expect changes to my initial structure...and your comments make it clear that i need to make a few changes already. -there are no fixed management fees (i should have mentioned this) so, i think i should change the initial proposed structure to 0% of first 0-10% (benchmark) 20% of 11-40% (standard) 30% of 41-100% (exceptional) 40% of 100%+ (crazy) There is also a max pain threshold i use to determine trade size and risk vs reward ratios. For example, if max pain is -10%...then i would risk 0.25% to make 0.5% (per trade) until the account either reaches +10% (110%) (20 net gains) or -5% (20 net losses). I avg 1-3 trades per day...sometimes more..sometimes zero..but this is an avg. I've never had more than 3-4 straight losses...but it never hurts to plan ahead. Once the acct is +10%, then i would risk 0.5% to make 1% (per trade) until the account either reaches +20% (120%) or +5% (105%) (10 net wins vs 10 net losses)...at which point i would revert to the previous risk/reward profile of 0.25% / 0.5%. My risk vs reward scaling is linear after that (0.75% / 1.5%, 1% / 2%, 1.25% / 2.5%) (again playing for 10 straight wins vs 10 straight losses) to prevent blowups, but still allow for compounding. I should add that these risk vs reward profiles are used to determine trade entry points...and do not necessarily play out this way in actual per-trade P&L...but these are the boundaries used to determine changes in trade size. Once a trade moves to in-the-money by a reasonable amount (say 40% of target), i tend to move the stop to breakeven (or very close to it). I plan to continue on this path until a time-based mark is reached (3-mos..maybe 6-mos) and re-evaluate. Does this make people more comfortable? I'm not expecting a string of losses (no trader ever does)...i just want to plan in the beginning for worst case scenario. Also, is there a way to create a hybrid Hedge Fund / SMA structure at IB (giving the investor SMA type access control)...but still providing for carried interest compensation for the manager? thanks guys...
but you can't do this can you? -------------------------------------------------------------------- 30% of 41-100% (exceptional) 40% of 100%+ (crazy)
IB will increase your fee's once you declare yourself as professional. And to charge out of those accounts you have to be a professional. Most states only allow you to trade for two individual without being licensed. I'm currently using IB's friends/family master account.
i talked with my investor, and he made some very logical points about incentives that i had not thought about. we decided on a flat 20%. perhaps in a year if i perform well, i'll start a capital raising and work thru this issue with new investors...but for a 1st investor, i can't argue with a flat 20% performance / incentive fee.
Just be "mindful" legally to charge you need an license (depending on your state). The series 65 is all you need and its a very easy test (140 questions, all multiple guess).