two and twenty
The traditional hedge fund fee structure charging a 2% annual management fee on assets and 20% of profits as a performance fee.
Example
“On a $100M fund earning 30%, two and twenty meant the manager collected $2M in management fees plus $6M in performance fees.”
Memory Tip
TWO AND TWENTY = hedge fund math. 2% of assets + 20% of profits. Very expensive.
Why It Matters
Understanding two and twenty helps investors evaluate the true cost of hedge fund investments and compare them to other investment options. These fees can significantly reduce your net returns over time, making it crucial to assess whether the fund manager can generate enough outperformance to justify the expense.
Common Misconception
Many people assume the 20% performance fee only applies to new profits made during the year, but it typically applies to all gains above a certain threshold or hurdle rate. This means investors can end up paying substantial fees even when their overall returns are modest or during market downturns where performance fees still apply.
In Practice
If you invest 1 million dollars in a hedge fund using two and twenty, you would pay 20,000 dollars annually in management fees regardless of performance. If the fund generates 500,000 dollars in profits that year, you would also owe 100,000 dollars in performance fees, totaling 120,000 dollars in fees, or 12% of your original investment.
Etymology
TWO (2% management fee) AND TWENTY (20% performance fee). The standard HEDGE FUND compensation formula.
Common Misspellings
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See Also
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