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Two & Twenty – Why Are Hedge Fund Fees Hitting An All-Time Low?

Hedge funds are a type of investment vehicle that seek to generate returns for their investors through various strategies, including buying and selling securities, taking long and short positions, and using leverage. 

One of the key features of hedge funds is their fee structure, typically known as the “2 and 20” model. This article will delve into the 2 and 20 fee structure, how it works, and why hedge fund fees are hitting an all-time low. We will also explore whether or not the Two & Twenty model is a reasonable way to compensate hedge fund managers. 

Let us start by understanding what this model is.

What is the Two & Twenty Hedge Fund Fees Model?
What is the Two & Twenty Hedge Fund Fees Model?

The 2 and 20 Hedge Fund Fees Model is a fee structure used by hedge funds to charge their investors. Under this model, hedge funds charge a management fee of 2% of the total AUM and a performance fee of 20% of the profits earned by the fund. This means that hedge funds charge their investors a fee for managing their investments and an additional fee for generating profits.

The management fee is typically charged to cover the costs of running the hedge fund, like salaries, rent, and other expenses. This fee is generally charged quarterly or monthly and is calculated as a percentage of the total AUM. 

On the other hand, the performance fee, as the name suggests, is charged on the performance of a hedge fund. By performance, we mean the profits the hedge fund generates for its investors. The performance fee is calculated as a percentage of the profits made. The standard is 20%. 

Together, these 2% & 20% make this hedge funds 2 and 20 fee model. Now, let us understand how this model works. 

How Does Two & Twenty Fees Model Work? 
How Does Two & Twenty Fees Model Work? 

The 2 and 20 Fee Structure works as follows:

  1. Management Fee: The management fee is a percentage of the total AUM. For example, if a hedge fund has $100 million in AUM and charges a management fee of 2%, it will charge its investors $2 million in management fees. As mentioned above, this fee is typically charged on a quarterly or monthly basis.
  1. Performance Fee: The performance fee is only charged when the hedge fund generates profits for its investors. For example, if the hedge fund generates a profit of $10 million, it will charge its investors a performance fee of 20%, or $2 million.

It is important to note that the 2 and 20 fee structure is applied after the hedge fund’s expenses are deducted from its profits. This means that the hedge fund manager will only receive the performance fee if the hedge fund generates a profit after all expenses have been paid.

Thus, this is how the model works. The 2 & 20 fee model has long been a standard in the hedge fund industry. But in recent years, it has been observed that hedge fund fees are questioned & the prices/fees are regularly decreasing. In the next section, let us look at why this is happening. 

If you need some ideas about what to read next, here they are:
Why Hedge Fund Fees Are Hitting An All-Time Low?
Why Hedge Fund Fees Are Hitting An All-Time Low?

Despite being the standard hedge fund fee structure, the 2 and 20  model remains questioned. Following are some reasons why hedge fund fees might be declining:

  1. Competition Among Hedge Funds: As the number of hedge funds has grown significantly over the past few decades, there is increasing competition among managers to attract and retain investors. Some hedge fund managers have had to lower their fees to remain competitive and differentiate themselves from other funds.
  1. Passive Investment Strategies: The increasing popularity of passive investment strategies, such as index funds, has led to a shift away from actively managed funds. Passive strategies have lower fees than actively managed funds, and investors are becoming more aware of the potential cost savings of these strategies.
  1. Mediocre Performance: The performance of some hedge funds has not always lived up to the expectations of investors, leading some to question the value of paying high fees for mediocre returns. In response, some hedge fund managers have lowered their prices to demonstrate their commitment to performance and alignment with the interests of their investors.
  1. Increased Regulation: The hedge fund industry has faced increased regulation in recent years, which has led to higher compliance costs for hedge fund managers. In order to offset these costs, some managers have had to lower their fees in order to remain profitable.
  1. Alternative Fee Structures: Some hedge fund managers have started to adopt alternative fee structures to the 2/20 fee structure, such as the “one and fifteen” model or the “one and ten” model, in order to differentiate themselves from other funds and offer more attractive fee structures to investors.
  1. Pressure From Investors: Investors have become savvier and are demanding lower fees from hedge fund managers. Some investors have even negotiated lower fees directly with the managers of their hedge funds to reduce their costs and increase their potential returns.
  1. Increased Scrutiny Of The Industry: In 2010 came the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under this, hedge funds need to register with the Securities and Exchange Commission (SEC) and disclose more information about their fee structure & operations. 

Despite the decline in hedge fund fees, the industry’s 2 and 20 fee structure remains the norm. While some hedge funds have started experimenting with alternative fee structures, such as charging a flat fee or a percentage of profits only, the 2 & 20 model remains the most widely used. 

Now, we’ve seen the reason for its decline. It’s time to evaluate whether it is a reasonable fee structure. Let us explore this part in the next section. 

Is Two & Twenty A Reasonable Model Or Not?
Is Two & Twenty A Reasonable Model Or Not?

Critics of the model argue that it aligns the fund manager’s interests with the fund’s performance rather than the investors’ interests. They say that the model allows managers to keep a significant portion of the profits generated by the fund, regardless of whether the returns are due to skill or luck. They also point out that the average hedge fund AUM, or assets under management, is significantly higher than the average AUM of traditional investment funds, leading to higher management fees for hedge fund investors. 

The hedge fund fee structure is broken. It is all about the structure & the net return for us as a long-term institutional investor. And suppose I can get the beta of each of those underlying asset classes at a very low cost. In that case, that’s my core foundation”, says Christopher Ailman, Chief Investment Officer of CalSTRS, the second-largest U.S. public pension fund. 

On the other hand, supporters of the model argue that it is necessary to compensate the fund manager for the risk and expertise required to manage a hedge fund and that the 2 & 20 model is reasonable given the value that hedge fund managers add to the fund. They also point out that the management fee, which covers the hedge fund’s operating expenses, is usually lower than the management fees charged by traditional investment funds.

Experts in the industry have also weighed in on the debate over the hedge funds 2 and 20 model. Some experts argue that the model is reasonable given the high level of risk and expertise required to manage a hedge fund and that the performance fee is necessary to incentivize the manager to generate returns for the investors. Others argue that the model is outdated and that hedge fund managers should be compensated based on their ability to add value to the fund rather than simply generating returns. 

In the words of Bryan Corbett, President & CEO of Managed Funds Association, “Hedge Funds aren’t for everyone. But clearly, a significant portion of allocators see it as an important part of the mix.”

Hearing both sides makes it difficult to decide which one weighs heavier. Overall, the debate on the 2 & 20 fee structure highlights the need for investors to carefully consider the fee structure of a hedge fund before committing their money. Investors need to understand not only the management fee and performance fee but also any additional fees, such as trading commissions or redemption fees, that may affect the fund’s overall performance. By understanding how hedge funds charge fees, investors can make better decisions regarding investments and the potential returns they may earn.

While this debate may continue on one end of the industry, there is a hedge fund on the other end, which is delivering extraordinary results and not charging any management fee. That makes it a no-management fee hedge fund. Let us have a look at it in our final section. 

The Bottom Line 

We have discussed the two & twenty hedge fund fee model- its significance, structure, how it works, and the reasons for its decline. We have also examined both sides of the debate about whether this is a reasonable model. 
While the debate might continue & more points keep on adding from both ends, you need to check out the highly successful hedge fund Secvolt, which charges zero management fees. Secvolt (www.secvolt.com) has generated year-to-date results as exceptional as 228.71% in 2022. This means it is delivering high returns as well as charging only performance  fees. Thus, you have an alternative away from this whole 2 and 20 debate. Secvolt is certainly a win-win situation for you!

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Ashish Verma

Ashish Verma is the founder and CTO of Secvolt, with close to 10 years of experience in the IT industry. He has been the technical backbone of the company and has worked tirelessly to make the technical infrastructure robust. He is a passionate entrepreneur who generates solutions that have the potential to bring change.

In order to ease the client’s interaction with Secvolt, he has strived to develop the business’s technological foundation and establish a user-friendly platform. Ashish has also contributed substantially to smoothening the company’s administration and ensuring that there are no lacunae in the broad structure of the organization. 

Early Years

Coming from a middle-class family, he was aware of the problems that people faced while using technology. He sought to create something that was simple to use yet had a powerful effect. As he studied computer science, he became eager to offer a solution to real issues. He began his professional career at Amdocs, where he gained expertise in client management while catering to more than 20 clients. Later, he moved to Citicorp, where he had exposure to the investment industry. His time at Amdocs and Citi enabled him to produce high-standard, efficient, and scalable technical infrastructure.

He left corporate jobs for his startup because he was passionate about working on the concept of a smart city platform. He expanded the concept internationally and even collaborated with Global Dignity-Kuwait. Things didn’t work out for him the first time. He states, “My failures didn’t stop me from experimenting and trying new things.” He rose from the ashes like a phoenix and founded FewerClicks, an End to End IT solution company.

He worked on the creation of Solster Finance, a decentralized financial platform based on the Solana blockchain. He created this platform single-handedly which has helped the team raise a $1M investment and a revenue of more than $5M within 6 months of launching. 

He has previously worked on many blockchain technologies and cryptocurrency ventures, which include Decentralized Finance Applications (Defi), Decentralized Applications (Dapps), File Contracts (SIA, record-keeper), Smart Contracts (rust, solidity), and NFT Development. His experience and effective communication have helped many team members understand Secvolt effectively and the underlying technology it is powered by.

He possesses the ideal combination of strategic thinking and excellent business insight. He is responsible for formulating technical aspects of the company’s strategy to guarantee alignment with business objectives. With his drive to experiment with new technologies, he has helped Secvolt achieve a competitive edge. Being in charge, Ashish never holds back in encouraging the different departments to make profitable use of technology, helping to grow as an unstoppable team at Secvolt!

Hanif Shaikh

Hanif Shaikh is the founder and CMO of Secvolt, with over 8 years of experience in the industry. He plays a crucial role when it comes to the growth of Secvolt. Since the beginning, he has acted as a mentor for each and every employee of the company, and he makes an effort to be accessible to his staff anytime they need him. 

Hanif first entered the Blockchain and Crypto world in 2016, and nothing has stopped him since. He views blockchain as a transparent platform that provides authority and accountability back to the people. He consistently believes that “overcommunication is better than miscommunication.” He has lived by this motto with his staff, clients, and networks.

Early Years

Hailing from Gujrat, a state in India, he is following his dream to contribute to making this world a better place. In the process, he has struggled, made some mistakes, and learned lessons from those mistakes to achieve success in life. His entrepreneurial attitude dates back to his childhood when he learned from his father’s business and aspired to have it all. He came from a humble background and had ambitions to succeed in life.

He has developed two successful businesses from scratch, and in the process, he has inspired young people to start their own businesses. He was an integral part of the Quora Mumbai Meetups and helped it become a great success in a short period of time. Later, he began organizing meetups to raise awareness about blockchain, cryptocurrencies, and their applications. He also shared his knowledge of ICOs, highlighted reputable ICOs, and established a small cryptocurrency community on WhatsApp groups.

He chose to go on a Blockchain Tour in India in 2019 and met some fascinating people. Throughout his journey, he has been able to build an extensive and robust network that has aided Secvolt’s growth. Because of his expertise and understanding of the Crypto Industry, he has been featured on several news channels and has advised the youth on the subject.

He is in charge of the company’s marketing operations and is responsible for developing its marketing strategy and vision. He oversees a group of passionate marketing professionals and plans promotional strategies with the goal of making  Secvolt a global brand. 

He is a perfect blend of a practical attitude and innovative business acumen. He believes in the ability of individuals to perform exceptionally well when given an environment to experiment and explore their passions; a culture that he has built at Secvolt.

Divakar Choudhary

Divakar Choudhary is the founder and CEO of Secvolt who has been trading for more than six years now. He started the business in 2018 with the conviction that if anybody could dominate the market, it was him. He poured all of himself into the business and turned Secvolt into a market-beating machine.

Divakar developed the fundamental quant models that perform risk management and capture alpha using his skills from the previous organization and his time spent in the market. In order to make the system effective, he backtested risk mitigation algorithms and worked on them for more than 4 years to produce results.

Early Years

He began his crypto journey in 2013 after getting his first gaming Laptop and melded in with the Blockchain community like sunbeams on the ocean. He created many YouTube channels at the age of 15 and businesses by the time he was 17. Technology has always piqued Divakar’s interest. He endeavored and succeeded at freelancing in his effort to achieve financial independence. However, he soon realized that freelancing would always keep him in the rat race, and the only way out would be to build a machine yielding generational wealth.

Soon, he started trading using his own capital but suffered a loss in the market. He says, “95% of people lose money & the rest 5% make money from the loss of those 95%.” He then began working on an effective technique to be included in this 5% after losing part of his own assets during the early stages of trading. He began evaluating quant strategies using statistical models.

With his methodology, he once produced a 20% ROI in a single month. With the zeal of creating something exceptional, he borrowed money from friends and family and generated decent returns for them using primitive quant models. Month after month, the system’s efficiency and the competence of the man behind it allowed for excellent market returns.

In the beginning, Divakar worked on his laptop for over 18 hours. It took every ounce of his energy as he executed about 530+ deals daily for 4 years to create this company from the ground up. In 2021, he increased his volume by 827%, trading a total of $52 million and hitting a single account.

In his words-

“What does becoming “THAT” GUY mean to you? Who did you need when you were young? Be that person!”

He is a perfect example of someone who followed his passion and made a fortune from it! He dreamt of creating generational wealth as a youngster, envisioned it as an adult, and is now making it a reality with Secvolt!