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Feb 24, 2010 1:35 am

At the risk of getting into the details, Section 205 of Investment Advisers Act of 1940 says contract cannot provide “for compensation to the investment adviser on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client”

Now, an equivalent structure is to set up a 2% management fee, portions of which will be refunded (voluntarily by the advisor) based on results. Refunds for performance are not contractually allowed. However, there has been an instance where SEC has allowed a client to receive partial refund for poor performance.

So, there is one precedence.  I have the thread the needle carefully.

That brings up the question of market potential. Any help would be appreciated.

  If your average return is 5% over your benchmark, then that seems like a lot of trouble to get 2.5% of fees - which can seem excessive to investors.  Although at the time of "selling them" your fee structure is kind of murky.   So you have two options (really three).   1. Be a RIA and manage client accounts on a discretionary basis without a performance fee.  The benefit of this is that you don't need accredited investors.   1a. Be a RIA as above but charge a performance fee (I'll provide you the law for free this time, but it will cost you in the future (I'm borrowing from your business model).  Benefit, you get your precious performance fee but you can only have accredited investors.   2. Run a hedge fund.  You can buy a hedge shell, as Cali pointed out, have your fancy performance fee, and it will be easier to manage (trading in one account as opposed to many).  Regulations are lighter so compliance is generally easier and less expensive.   Drawback - under the new custody rules you will "have custody" of client funds so you will have a fairly costly audit on an annual basis.
Feb 24, 2010 1:40 am


[quote=Wet_Blanket]Just out of curiousity, what is your performance so far against VTSMX?


My performance (internal rate of return) is +5% above Wilshire5000.
It is not due to a single pick that was a multi-bagger. It was over a 10-year period.
I am not a amateur who does this sporadically - passed all 3 levels of CFA.

I plan to get into this full-time. But I do not have sufficient AUM currently. So, I am giving 3+ years runway to accumulate assets.


I've taken all three levels of the CFA exam, and I'm pretty sure the performance fee rules are in the alternative investments module of the CFA curriculum.  I'm sure of it in fact, because I have them in front of me right now.
Feb 24, 2010 1:47 am

Ravi - my cousin, my blood (I’m serious, I have a cousin named Ravi who lives in London who has acted in some movies over there), I think this is really a bad idea. 

I think your best bet is to start an SMA using your track record.  I’m assuming since you are a charterholder (are you?) that you will be using GIPS standards?  You really don’t need a performance fee.  Without accredited investors, it’s not going to do you much good. 

If you are getting paid a performance fee on a $50k account, it’s not going to be great.

You have a bigger problem though.  Gathering clients.  Even if you have a great, new and innovative method (I have one as well), it is extremely difficult to gather clients.

If it were easy, I would have started an SMA or a hedge fund years ago.  You need to learn how to sell (and not just sell, sell investments).  It is extremely difficult. 

You will have some other difficulties, such as overcoming the Indian stereotype.  I hope you don’t have an accent, but from your posts, I’m guessing that you do.  It would be better if you had a British accent.  Americans think British people are smart because of the accent.

All of that said, good luck.  PM me if you want some asset gathering ideas.

Feb 24, 2010 1:50 am

The best thing Ravi can do is send me $15,000 and I'll tell him it won't work.