Wednesday, January 14, 2015

Saturday, January 10, 2015

Why did Warren Buffett close his investment partnership in 1969?


Warren Buffett started his entrepreneurial career as a hedge fund manager. In 1966 he stopped taking outside money and in 1969, he returned money to his customers and closed the partnership. 

Currently his investment platform Berkshire Hathaway is a public traded holding company rather than a hedge fund or PE firm.

In a typical hedge fund, limited partners can withdraw capital quarterly (or even monthly). It's not a problem if a fund makes short-term investments or trades with the similar horizon (i.e, quant funds, arbitrage funds, etc). However, it's a big problem for the funds pursuing long-term investment strategies. Buffett wants to move capital across businesses while not having noisy partners (customers) annoy him all the time when returns don't look as outsized as past performance.

Thursday, January 8, 2015

Investment Partnerships 101

If you want to co-invest with other people, you need an entity that can combine your capitals. Depending on what this entity invests into, and who is allowed to join it, various types of investment partnerships are possible.

Hedge Fund: 
An investment partnership restricted to "sophisticated investors" - people who have enough experience to protect themselves. Hedge Funds are not allowed to accept capital from general public (investors need to be accredited); in exchange, they don't have restrictions on what they can invest into. The professional fund manager is then compensated with a share of the money for his/her time and efforts.

Mutual Fund:
They invest in publicly traded securities (stocks & bonds), and anyone is allowed to join. To protect general public investors, Mutual Funds are heavily regulated and restricted in what they can invest into. Mutual fund managers receive a fixed fee.

Private Equity Firms:
Private equity firms characteristically make longer-hold investments in target industry sectors or specific investment areas where they have expertise. Private equity firms and investment funds should not be confused with hedge fund firms which typically make shorter-term investments in securities and other more liquid assets within an industry sector but with less direct influence or control over the operations of a specific company. Where private equity firms take on operational roles to manage risks and achieve growth through long term investments, hedge funds more frequently act as short term traders of securities betting on both the up and down sides of a business or industry sector's financial health. 

Private equiteers attempt to buy companies at low EBIT multiples with high leverage and make their money increasing operational efficiency and maintaining highly disciplined capital management. Their preferred holding period is dependent on returns but generally not more than 5 years and usually less.

One example in Turkey is Turkven.

also there are some others...

Bonus: 2 and 20 Fee Structure

The 2 and 20 fee structure is the way that most private equity firms (incl. hedge funds) are compensated. More specifically, this phrase refers to how hedge fund managers charge a flat 2% of total asset value as a management fee and an additional 20% of any profits earned.

Considering that some of the top performing hedge funds earn upwards of 50% returns per year and that a given manager can manage billions of dollars worth of assets, this type of fee structure can be very lucrative for managers who consistently earn high returns.