Buffett went a different route.

In his early partnerships, Buffett decided to charge a 0/25 fee—no management fee, and 25% of profits above a certain level. (He had a few variations of this based on the certain level; but, he never charged a management fee. He was performance-only.)

For Buffett to pay his bills, pay salaries to his staff, or pay bonuses, his investors had to earn money. If they didn't make money, Buffett had to foot the bill out of his own savings. It was one heck of an incentive to protect and perform.

PUTTING HIS MONEY WHERE HIS MOUTH WAS

If you agreed with Buffett's investment philosophy, you'd be nuts not to invest with him. Buffett was offering a sweet deal: As an investor, you wouldn't pay Buffett a dime unless you were earning more than 6% on an annualized basis (the "hurdle rate"). Beyond that, you would split each dollar of profits: $0.75 for you, $0.25 for Buffett.

So, if you earned 5% or if you lost 10%, Buffett made nothing. If you earned 8%, Buffett made 0.5% and you took home 7.5%. If you earned 30%, you took home 24% and Buffett took home 6%.

Not to pick on American Funds, but the Investment Company of America is one of the largest mutual funds around. Over the past ten years, The Investment Company of America has returned, on average, 3.10% to investors—less if they paid a commission to buy it. From where it stood on October 31, 2008 and if Buffett were at the helm, it would have to grow 32% immediately before Buffett could even think about earning money.

But, the ICA is not an Early Buffett Partnership; so, the investment manager will take home about $140 million this year. American Funds will collect $200 to $300 million in distribution fees, plus another $50 million or so for postage, reports, "administrative" services and the likes.

THE HURDLE, THE FEE, AND THE HIGH WATER MARK

No...it's not the bedtime story I tell my kids. Buffett's early partnerships had three components you should be aware of if you are looking for a hedge fund or thinking of starting your own:

• Fees. Buffett charged no management fee, just a performance fee based on profits. It was a 0/25 hedge fund.
• Hurdle Rate. Before Buffett could earn his performance fee, investors had to earn more than 6% for the year.
• High Water Mark. If investors were not earning 6% annualized, Buffett couldn't charge a performance fee no matter how stellar a particular year was. Example: If Buffett lost 50% his first year, and then gained 80% his second, investors would have an annualized return of (5%). Even though his second year was stellar, Buffett could not charge a performance fee because his investors would have earned less than 6% annualized.

WHO RUNS AN EARLY BUFFETT PARTNERSHIP?

It's tough to find this answer because the SEC doesn't let hedge funds advertise. If you know of an Early Buffett Partnership, please post it in the comments or e-mail me. (If you run an Early Buffett Partnership, e-mail me.)