The Dhandho Investor: The Low-Risk Value Method to High Returns

by Mohnish Pabrai

He charged no management fees to his partners—only performance fees. Investors paid no fee until Mr. Buffett gave them a return of at least 6 percent a year. Above that number, he took 25 percent and investors got the rest. If the fund was up 10 percent for the year, Mr. Buffett got paid 1 percent. If it was up 30 percent, he got paid 6 percent of assets. It struck me that Mr. Buffett’s structure was very fair relative to the rest of the industry. Virtually all no-load mutual funds charge between 1 percent and 2 percent of assets annually as their fees, regardless of whether they make or lose money. Most hedge funds charge a 1 percent to 2 percent management fee and 20 percent of the profits. If a 2 and 20 (2 percent fee; 20 percent of profits) is up 10 percent before fees, on an after-fee basis investors would receive just 6.4 percent.