Two And Twenty

  

Categories: Managed Funds

See: Carry.

It's the fee structure of most hedge funds (and private equity and venture capital and other hybrid funds). That means it's a 2 percent fee, usually assessed monthly on assets under management. That is, 2 percent of the total. And it's 20 percent of the profits left over, that get paid to the General Partners via the Limited Partners' investment in the fund.

The fee structure is so common, it's referred to just by the numbers. Yes, some venture funds get 2 and 30. And most lesser funds get 1 and 10 or so. But 2 and 20 was pretty standard for a long time for hedge funds. And that's a whole lot more expensive than the 0.3% index funds (i.e. 0.3% fee and no carry). Hedge fund performance had better be pretty amazing to warrant those massive fees (and it usually isn't).

Related or Semi-related Video

Finance: What is carry?2 Views

00:00

And finance Allah shmoop What is Carrie shmoop Ah the

00:07

Holy Grail The warmth of the wealth The golden ring

00:10

worth fighting for That's what it is Partners in an

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investment firm who get quote kari unquote for their investing

00:18

efforts essentially carry out of the office loads and loads

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and loads of dough Well how does this magic happen

00:24

Well here's the math explanation You're one of three partners

00:28

at Joe Bob and Sill Ease Venture Capital Shop You

00:31

have five hundred million bucks under management under a two

00:34

and twenty five structure That is you get two per

00:36

cent of that money per year as fees just kind

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of managed company And then you also get twenty five

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percent of profits from that fund Those profits are your

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carry questions How do you calculate them Yourjob to invest

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that five hundred million dollars and make money for your

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shareholders Your limited partners as they're called and you three

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here are the general partners so you go along investing

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and you take ten mil a year in fees and

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that two percent of the five hundred mill and those

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fees cover the salaries and small bonuses to the dozen

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or so junior partners you have all Stanford MBA is

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running around like chickens with their heads cut off squawking

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for hot deals and cold calling CEOs of private companies

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They bring you those deals and you say yea or

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nay The two percent of your fee also covers you

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know secretaries and rent and insurance and travel and conference

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going in lawyers in an end So five years go

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by and you've taken out ten mil a year in

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fees each year for a total of fifty million dollars

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As you've invested the remaining four hundred fifty million dollars

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right you made eighty investments total Fifty of them went

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totally bankrupt On twenty of them You got your money

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back and on ten you made an average of while

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twenty times your money or thereabouts Not all of the

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investments were the same amounts but the result was that

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on your four hundred fifty million dollars of actual infesting

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you turned that money into two billion dollars When those

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hot cos you funded early in their existence went public

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in a night Pio and then six months and a

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week later you distributed the shares you had in them

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so the profit calculation is based on the original five

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hundred million You Ray's not the fifty million of expenses

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you had while administering the fund So on exactly two

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billion dollars of realized profits you had one point five

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billion dollars of profits Meaning you sit behind that fifty

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million and expenses that's on you baby And no in

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the venture capital world ofthe most nobody cares whether it

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took you three years or six years or twenty years

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to make those profits There is oddly little attention paid

02:31

to the time value of money in that world at

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least in Silicon Valley So on that one point five

02:36

billion dollars your Carrie was twenty five percent or three

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hundred seventy five million dollars You split it three ways

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with your partners and each of you takes out a

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cool hundred twenty five mil Even cooler you have likely

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raised a new fund every two or three years So

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you get these waves of dough coming in every few

02:54

years at least regularly And then after enough years of

02:57

doing this business while you get to buy one of

02:59

these yeah that's Carrie

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