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5:00How a Hedge Fund Actually Charges 2-and-20
The headline says "2-and-20". The reality is a 2% fee you pay even when you lose money, a 20% cut of gains that only counts above a moving line, and an effective rate that has historically swallowed roughly half of the profits.
"2-and-20" is shorthand for two very different fees stapled together. The management fee (the "2") is charged on assets under management (AUM) every year regardless of performance — it pays salaries, rent and systems, and it is collected whether the fund is up, down or flat. The performance fee, or incentive fee (the "20"), is a share of the profits the manager generates. Only the second fee is supposed to align the manager with you, and it is hedged about with conditions that decide whether it gets paid at all.
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