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 are Assets Under Managemen...8 Views

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Finance a la shmoop what are assets under management?

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[People meditating in a park] yeah that's how it's pronounced.... the yoga mantra AUM mutual funds charge

00:15

fees based on the assets they have under management the larger the asset base the

00:21

bigger the fees they can charge and you know size matters mm-hmm all right well

00:27

most fees are based on a given set of percentages of the total and a lot of [Woman approaches starbucks employee]

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people only want the big mutual funds because well they pay their employees

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the big bucks and presumably big money buys big talent and that's generally [Boy strikes baseball]

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true in baseball right well in a mutual fund family for example there are break

00:44

points in fees that look a lot like the structure of break points in the

00:49

progressive tax system of the United States that is different percentages are

00:53

charged on different levels of you know size for the first billion dollars under

00:58

management a fund might charge 2% like 20 million dollars a year for managing

01:02

that first billion but then from one to five billion the fee might be one and a

01:06

half percent so on that next four billion the fee might be sixty

01:10

million bucks a year then from five billion in assets under management to 15

01:15

billion ie that next 10 billion in size the fee might be one percent or a hundred

01:20

million dollars on that next ten billion of assets for enormous mega funds like [Mutual fund breakpoint table]

01:24

ones with over fifty billion dollars in assets well the fee on that last dollar

01:29

might be just a third of 1% or less and that fee structure creates a wonderfully

01:35

stable revenue base to the fund manager why and like why is this important well [Man discussing mutual funds by a farm]

01:40

you know the stock market volatile so the assets go up and down with the market right well why

01:45

is it valuable because the lion's share of fees are generated from the [Lion walking in a desert]

01:50

"early" part of the fund i.e the low dollar asset amount where the fees

01:55

are a relatively high percentage think about a mega fund with 50 billion

02:00

dollars in AUM well the fee on that last billion might [$50 dollar sack of cash in mega fund]

02:04

be just that 30 basis points or 0.3 percent or just three million dollars

02:10

note that the fee on the first billion dollars of this

02:13

fund was 2% or 20 million bucks a year so if that fund contracts well it's not

02:20

that much of a loss like it could lose that last 10 billion in assets, assets

02:26

under management by going from 50 billion to 40 billion which would be 20%

02:29

of the total of the fund but only lose like 3% of its revenues for the

02:34

privilege of managing all that money why this fee structure?

02:38

well the marginal additional work to manage 50 billion over 40 billion well

02:43

just isn't that much extra work got it that's how assets under management

02:47

generally work at big mutual fund families and that's the lion share of [Mutual fund breakpoint table and lion shadow appears]

02:52

actively managed money at least today in this country so yeah while the fund

02:56

manager sits back and collects those glorious fees while she can be at one [Fund manager performing yoga and woman carrying pile of cash]

03:00

with the universe and keep chanting that AUM, as she collects her fees say it with

03:05

me fee collecting...[Man meditating]

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