What does 'Two And Twenty' mean

Two and twenty is a type of compensation structure that hedge fund managers typically employ in which part of compensation is performance-based. This phrase refers to how hedge fund managers charge a flat 2% of total asset value as a management fee and an additional 20% of any profits earned.

BREAKING DOWN 'Two And Twenty'

The 2% management fee is paid to hedge fund managers regardless of the fund’s performance. A hedge fund manager with $1 billion of assets under management (AUM) earns $20 million even if the fund performs poorly. The 20% profit fee is only paid once the fund achieves a level of performance that exceeds a certain profit threshold, typically around 8%, which a relatively few funds have achieved since 2010. Many investors, who have never paid the 20% fee because there haven’t been any profits, consider the 2% management fee to be too high relative to the overall performance of many funds.

When High Fees Are Justified

One the world’s most successful hedge funds since 1994 has been Renaissance Technologies, led by Jim Simmons, a former NSA code breaker. At $65 billion in AUM, his fund generates $3.2 billion in annual management fees. Because of his remarkable outsized returns over the years, he also charges a 44% profit fee. It is estimated that his hedge fund returned an average 71.8% between 1994 and 2014. The fund's worst performance between 2001 and 2013 was a 21% gain. When asked by investors why his profit fee is so high, he responds by telling them they can leave if they want – but few do.

No Longer Two and Twenty

Due to their underperformance or inconsistent performance, many hedge fund managers have come under pressure to reduce their fees. Investors have been redeeming assets with poor-performing hedge funds at a record pace, with a large portion being reallocated to larger funds with stronger track records. To stop the bleeding, hedge fund managers have been complying. In 2015, the average fee arrangement stands at 1.5% of assets and 17.7% of profits. However, the top-performing hedge funds still charge 20% or more.

Investors are not the only ones complaining about high profit fees. Hedge fund managers are also coming under pressure from politicians who want to reclassify the profit fees as ordinary income for tax purposes. As of 2016, their profit fees, also referred to as carried interest, is classified as capital gains, which are taxed more favorably. Fund managers contend that carried interest is not a salary, but that it is an at-risk return on investment payable based on performance.

RELATED TERMS
  1. Performance Fee

    A payment made to a fund manager for generating positive returns. ...
  2. Hedge Fund Manager

    The individual who oversees and makes decisions about the investments ...
  3. Hedge Fund

    An aggressively managed portfolio of investments that uses leveraged, ...
  4. Management Fee

    A charge levied by an investment manager for managing an investment ...
  5. Exchange Fees

    A type of investment fee that some mutual funds charge to shareholders ...
  6. Fund Manager

    The person(s) resposible for implementing a fund's investing ...
Related Articles
  1. Managing Wealth

    HF Performance Report: Did Hedge Funds Earn Their Fee in 2015?

    Find out whether hedge funds, which have come under tremendous pressure to improve their performance, managed to earn their fee in 2015.
  2. Investing

    Hedge Funds: Higher Returns Or Just High Fees?

    Discover the advantages and pitfalls of hedge funds and the questions to ask when choosing one.
  3. Investing

    Hedge Funds' Higher Returns Come At A Price

    Learn how hedge funds win big gains for investors - and why they sometimes lose.
  4. Investing

    Fund Of Funds - High Society For The Little Guy

    Like a mutual fund, FOFs provide instant diversity by grouping many hedge funds into one product.
  5. Investing

    Hedge Funds Go Retail

    Find out how average investors are breaking into what was once reserved for the ultra rich.
  6. Financial Advisor

    Why Hedge Funds Are Not Living Up to Return Hype

    Hedge funds are supposed to produce better returns while protecting your investments from the downside. Here's why they are not living up to their purpose.
  7. Financial Advisor

    Hedge Funds: Under Pressure or Under Assault? (AIG)

    Find out whether the recent massive outflows from the hedge fund industry represent an all-out assault or weary investors losing their patience.
  8. Investing

    6 Reasons Hedge Funds Underperform

    Understand the hedge fund industry and why it has grown exponentially since 1995. Learn about the top six reasons why the industry underperforms.
  9. Investing

    What Investment Is Best For You?

    ETFs, mutual funds, hedge funds and advisory firms are just some of the choices to consider.
  10. Financial Advisor

    4 Reasons to Still Consider Traditional 2 & 20 Hedge Funds

    Find out why traditional 2 & 20 hedge funds are still worth considering as an investment, even though they have underperformed for the last several years.
RELATED FAQS
  1. What is the purpose of a hedge fund?

    Find out what a hedge fund is, how it is set up and why it is different than other forms of investment partnerships like ... Read Answer >>
  2. Where does a hedge fund get its money?

    Learn how a hedge fund is structured and how the managing partner of the fund goes about the process of finding and soliciting ... Read Answer >>
  3. How do hedge funds use short selling?

    Learn how hedge funds use short selling to profit from stocks that are falling in price. Explore different analytical techniques ... Read Answer >>
  4. Can mutual funds invest in hedge funds?

    Learn about mutual fund portfolio management techniques and mutual funds' ability to invest in hedge funds, as well as new ... Read Answer >>
  5. How do hedge funds determine what assets to own?

    Learn about the various types of investments that hedge fund managers use, and explore basic hedge fund management trading ... Read Answer >>
  6. Is smart beta cheaper than hedge funds?

    Discover how to estimate and compare the added expenses for smart beta strategies and hedge funds to see if they are the ... Read Answer >>
Hot Definitions
  1. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  2. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  3. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  4. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  5. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  6. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
Trading Center