Köli Fund has company: zero management fee funds*

It is interesting to see a local fund following the footsteps of the Buffett Partnership and Köli Fund’s.

In the past, before Berkshire Hathaway, Buffett invested client capital alongside his, being compensated by 25% of profits that exceeded a 6%/yr hurdle. The clients also paid the operating expenses of the Partnership:

On January 1, 1962 we consolidated the predecessor limited partnerships moved out of the bedroom and hired our first full-time employees. Net assets at that time were $7,178,500. From that point to our present net assets of $104,429,431 we have added one person to the payroll. Since 1963 (Assets $9,405,400) rent has gone from $3,947 to $5,823 (Ben Rosner would never have forgiven me if I had signed a percentage lease) travel from $3,206 to $3,603, and dues and subscriptions from $900 to $994. If one of Parkinson’s Laws is operating, at least the situation hasn’t gotten completely out of control.

In making our retrospective survey of our financial assets, our conclusion need not parallel that of Gypsy Rose Lee who opined, when reviewing her physical assets on her fifty-fifth birthday: “I have everything I had twenty years ago – it’s just that it’s all lower.”

Buffett kept expenses at very low levels and they decreased considerably relative to assets under management over time.

Mint Capital, a brazilian asset manager, will charge 30% of returns that exceed that of the brazilian index, the Ibovespa. No management fee.

With Köli Fund, a Cayman-based investment vehicle, we keep 25% of profits that exceed a hurdle of 3%/year, but with 3 interesting differences:
1/ The performance fees are only paid in cycles of 3 years.
2/ The fees paid have to be converted into new shares of the fund.
3/ Such shares are only redeemable in 2 instances. First, when the firm needs to pay taxes on this revenue, but only on the amount of such taxes. Second, if the investor redeems his investments in the fund partially or fully, reducing or ending the firm’s commitment with the investor.

I like the marriage. I love the skin in the game. It helps sleeping well at night.

*BUT… on the subject, it is key to explain how incentives works, because it might be a very bad deal for an investor to invest with a zero-management fee investment manager.

That might happen when 1/ the manager doesn’t have integrity, only focused on the asymmetry of the arrangement, and 2/ when the manager needs to perform well in order to pay the bills in the short-term. When rent is late will the manager focus on paying his rent or in taking care of his clients’ investments? I don’t think a person with negative cash flow and few assets thinks clearer than someone with ample cash flow to support himself or his business.

The capital inside Köli Fund represents a fraction of the total assets that Köli Capital, a family office, manages and gets adequately paid for in absolute terms (small as % of total AUM) for doing so. When I founded the firm my first and foremost worry was “How do I increase the odds of staying alive for at least a few years without causing harm to clients?”.

And then I followed Buffett’s and Guy Spier‘s footsteps.

I used a 8.25sqm office provided by one of the families, for free. I moved my home to a cheaper neighborhood (where my parents and old-time friends, who don’t care if I am rich or not, live) to keep my personal costs low, increasing my resilience (personal assets / personal expenses) and also running away from the noise of where I used to live, full of hedge funds in Rio, among other things. The firm’s expenses included a reasonable salary to myself and, important too, I had adequate savings earned over the years in the market, helped by crazy high long-term real rates in Brazil.

Adequate working conditions are vital: the right people (even if a team of 1) focused only in thinking deeply about taking care of other people’s hard earned savings. With TIME to pause, reflect, the ability to separate signal from noise, to separate trading due to P&L and psychological strain versus trading due to changes in actual risk-reward, etc.

The gene of deferred gratification of an investing team is key. Markets don’t care if you’re in a hurry to make money.

Worry first if the money manager is focused on being able to manage the fund properly instead of making a quick buck or paying his bills right of the bat.

Focus on finding managers that worry more about compounding high returns, at being good at the game, instead of accumulating assets and having optionality over his clients.


Feel free to get in touch. I will surely answer you when I find some time. A brief introduction would be welcomed.