Small scale investment fund

I have been thinking for a while about managing investments on behalf of family and friends to increase the funds I have available to play with to fulfil all the investment ideas I have. I would like to charge a management fee modelled on that used by Warren Buffett in his early days. Something along the lines of taking a proportion of investment income above a certain benchmark (such as the long-term government bond rate), which would remain invested alongside investor's capital. To stop me making silly investments and put my investors at ease, I would also offer a personal guarantee to reimburse losses up to this benchmark rate. I know it sounds a lot like the way the scrapped resources super profits tax worked, but I got the ideas from the biography on Buffett entitled "Snowball". I think the model does a much better and fairer job of aligning the incentives of the fund manager to the interests of investors. I find it a bit rich when large fund managers take their 2% fee even as their funds halve in value (and sometimes take a performance fee on top for not losing as much as the index!!:().

Such a fund could be used for property investments, but I would probably focus more on listed equities. Anyway, I find the Corporations Act more than a little light reading so I was hoping people here could point me in the right direction for the best way to set up such a fund without needing to go through such a load of red tape to make it not worthwhile. For example, I would like to avoid the need to obtain an AFS licence (at least until I have many millions under management :D). The exemptions for small-scale offerings that have less than 20 investors and raise less than $2m per 12 month period look promising. I wouldn't be advertising it publicly. Has anyone had any experience setting up something like this and are there any tricks to watch out for?

What would be the best structure for such a fund? I imagine a unit trust would be the easiest to manage.

For more on the topic, and which prompted me to post after having it rolling around in my head for so long, see the July issue of API and the accompanying web special on DIY property syndicates (http://www.apimagazine.com.au/api-online/web-specials/2010/07/diy-syndicates). Are there any legal differences (apart from stamp duty liability) between syndicates investing in property or shares?
 
The exemptions for small-scale offerings that have less than 20 investors and raise less than $2m per 12 month period look promising. I wouldn't be advertising it publicly. Has anyone had any experience setting up something like this and are there any tricks to watch out for?

Definitely use the 2-12-20 rule - or you will run foul of ASIC really fast.

The main trick to watch our for is to try not to lose your client's money (as stupid as it sounds...).... I am not sure how you will provide the guarantee?

Takes a bit to stay on top of the accounting however if you have a lot of transactions.

Also, you need to take into account how the returns are "paid" to the investors - i.e. as CG? Do they get dividends passed on? Do they get and franking credits passed on?

It may be simpler to set up a DFT, raise the capital as loans, and paying the investors a varying interest on that loan based on the returns of your activities. You may also need to consider witholding tax etc (i.e. collect tax file # etc) with regards to your payees.


Cheers,

The Y-man
 
You will need specialist legal advice on this - you don't want to fall foul of ASIC.

This would be classed as a managed investment scheme under s9 of the Corporations Act
http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s9.html#managed_investment_scheme

s 601ED describes when these have to be registered.
http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s601ed.html

See also Chapter 5C of the corporations act in general.

Please let us know what you find out too.

Thanks Terry,

http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s1012e.html seems to be the exemption I would be looking to work under. (And yes, I would get legal advice before proceeding, but wanted to educate myself a little first.)
 
Definitely use the 2-12-20 rule - or you will run foul of ASIC really fast.

The main trick to watch our for is to try not to lose your client's money (as stupid as it sounds...).... I am not sure how you will provide the guarantee?

Yeah, not sure exactly either, although to start out with just family members as investors, perhaps my word and reputation are enough to build trust. Perhaps down the track, I could lodge collateral as security against the guarantee.

Takes a bit to stay on top of the accounting however if you have a lot of transactions.

Also, you need to take into account how the returns are "paid" to the investors - i.e. as CG? Do they get dividends passed on? Do they get and franking credits passed on?

It may be simpler to set up a DFT, raise the capital as loans, and paying the investors a varying interest on that loan based on the returns of your activities. You may also need to consider witholding tax etc (i.e. collect tax file # etc) with regards to your payees.

I would have thought that a unit trust can distribute income in various forms (CG, franked dividends etc.) proportionally to the performance of the underlying assets. I know with managed funds I have invested in, I get a statement after the end of the financial year stating the various components of the distributions so I know what to put on the tax return. By law a trust must distribute all income to holders. I had thought of a DFT as an option, but thought the investors might not like the discretionary nature of the trust. With a unit trust, the unit holders have an entitlement to the income and underlying assets.
 
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