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Let's suppose I am starting to manage some money. The money is invested in ETFs, particular de VOO.

Let's suppose I have partner one with 1,000 USD, and with this, I can buy 10 shares of VOO at 100 USD price per share. (not real price). My average price per share would be 100 USD.

Then, another partner 2 gives me 2,400 USD, and I buy more shares of the same ETF, but this time at 120 USD per share. This would update my average price from 100 to 113 per share.

In 3 months, the price of the ETFs will gain 5%, (again, fictional), and the "partner 1" wants to subtract his money at a price of 126 per share.

This means a 5% gain at the price of the partner 2 and 26% gain at the price of the partner one. And more importantly, it means 11.50% gain over the average price of the portafolio.

How should I return (or how much) to the partner one? Over his 26% percent or over 11.5% of the total portfolio?

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    $\begingroup$ Whether you manage money as individual accounts, or as an ETF, or mutual fund, the result is the same: each partner gets the performance that corresponds to their entry and exit point (not based on some kind of meaningless average). This is a legal (and ethical) requirement. You cannot take the profits made by A and give some of them to B. If there are some common costs they have to be allocated fairly to all. $\endgroup$
    – nbbo2
    Commented Jul 6, 2020 at 0:18

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Generally, managers take subscriptions and redemptions periodically, the frequency of which is defined in their offering documents. At the end of each period (daily, monthly, quarterly, etc), a NAV is struck, redemptions are processed, and subscriptions are processed, in that order. Striking a NAV is something that has to be done before any subscriptions or redemptions are completed so that each partner gets the proper return. Using your numbers from above, the partner accounts should look as follows:

Since Partner 1 is the only investor they have 100% allocation of all gains and losses

Period 1

Before the addition of Partner 2, Partner 1's gain/loss is crystallized before adding Partner 2's capital to the pool, notice Partner 1's beginning balance for period 2 is the same as the ending balance for period 1. At this point, while the Allocation % changes, the percentage gain/loss that is attributed to each partner account is equivalent to the change in the underlying assets over the period of time each partner was invested and each partner gets a pro-rated share of it.

Period 2

You have to repeat the process of crystallizing gains/losses (striking a NAV if you were running a fund) before processing subscriptions and redemptions. So, after Partner 1 redeems, you are left with Partner 2 receiving 100% of the allocation for Period 3

Period 3

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  • $\begingroup$ Nice! question: is this the common industry rule? I suppose yes. $\endgroup$
    – marz
    Commented Jul 7, 2020 at 0:29
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    $\begingroup$ Yes, in general. There are special situations but this is common. $\endgroup$
    – amdopt
    Commented Jul 7, 2020 at 0:47

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