How do you go about returning money to investors

Ive been given a bit of money from my relatives to manage for them in my stock portfolio. I'm wondering what is the best way to go about reporting returns and liquidating their initial investment. Lets say they toss me a stake of $10k and my existing portfolio is worth $90k for simplicity. Im thinking they ought to get 10% of the excess returns I generate. If I were to add more of my own money in, their share would get diluted unless they put up more capital.

Now some outstanding questions I have:
1. If I were to liquidate one of my positions, should they automatically get a cut of my excess returns? What if I plan on reinvesting the proceeds?

  1. Lets say they decide to cash out three years down the line. Do i just write a check for the implied return since I will have likely not exited my investments? Given that I will have to pay taxes on capital gains, should i net that out from their returns along with a 20% performance fee? So if they end up earning $10k on a $10k investment, I take $2k away from the long-term capital gains tax i will end up having to pay later on and $1.6k (20% of remaining 8k) as a performance fee?

Any advice on how to keep this simple is appreciated!

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Comments (5)

  • Associate 2 in VC
Jul 2, 2020 - 3:03am

Most funds aren't legally allowed to reinvest capital gains and have to distribute the profit to their investors (usually on a schedule - every year or every quarter). So if you want to emulate an actual fund, the best thing to do is to distribute the capital gains back to the "LPs" when they're realized.

Most Helpful
Jul 2, 2020 - 1:03pm

I would not recommend doing this informally - which is my assumption reading this. At a minimum, do it via an investment club or make a formal partnership, etc. Consult an attorney. Have documentation.

You have two major issues here - one is that it's family. Shit goes bad when family is involved. I know you trust your great uncle paul and he knows what he is getting into - but if you kill it, or lose it all, people have hard feelings. Just be very aware of this when you do it. You talk a lot about making money - what happens when you burn through their 10k? Today they may not care - but when you hand them $5k they may very well get pissed, etc. Just think through these things.

Second is legal. Yeah, sure, this is small time. And they are 'gifting' you, probably, less than 10k so as to avoid much scrutiny or whatever. And it's informal - so who cares and who would know, right? The IRS and SEC care - especially if you kill it. I'm not going to pretend I know the ins and outs of the laws but I can say this - you don't want to piss off either of those entities.

You are creating a monster headache by just tossing some cash from your family into a commingled account. My advice is do it formally - or simply pass along your ideas and call it a day.

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