Understanding the Two and Twenty Fee Structure
Introduction to Two and Twenty
Two and Twenty (2 and 20) represents a prevalent fee model used in the realms of hedge funds, private equity, and venture capital industries. It’s where the real money making—or, for the cynical, the real money taking—happens in asset management!
How Two and Twenty Works
In the lingo of finance, ‘Two’ refers to a 2% annual management fee on assets under management (AUM), ensuring fund managers obtain a steady income. Picture earning a cool $20 million annually with a $1 billion AUM, not bad for a day’s work, right?
The ‘Twenty’ brings more zest to the party—it’s a 20% incentive fee of the profits earned above a predefined performance threshold or hurdle rate. But wait! There’s a catch named ‘high watermark,’ ensuring fund managers don’t earn performance fees unless they exceed the fund’s peak performance. Think of it as not getting praised for re-baking an already baked pie.
Performance Under the Microscope
Despite its controversial nature, this fee structure is believed to foster a performance-driven environment. It’s a golden goose for those fund managers who consistently lay golden eggs, turning them into characters from Forbes’ lists. On the other hand, it raises eyebrows amongst investors and lawmakers when results aren’t stellar.
The Billion-Dollar Question
The perpetual debate remains—do funds justify these hefty fees? While critics argue that performance may not consistently counterbalance the costs, supporters cite substantial profits and expertise offered by top-tier fund managers.
Related Terms
- Hurdle Rate: A benchmark profit level a fund must achieve before charging the performance fee.
- High Watermark: Ensures performance fees are paid only on net new profits above previous peak.
- AUM (Assets Under Management): Total market value of the assets managed by a financial institution.
Suggested Reading
- “More Money Than God” by Sebastian Mallaby - a riveting walk through the evolution of hedge funds and their influence.
- “The Alpha Masters: Unlocking the Genius of the World’s Top Hedge Funds” by Maneet Ahuja - stories of success and strategies from finance magnates.
Dive into these readings, and perhaps you can initialize your own ‘Two and Twenty’ scheme, though starting with ‘Two and Twenty cents’ is more relatable for us mere financial mortals.
