Posted in Finance, Accounting and Economics Terms, Total Reads: 207
Definition: Two and Twenty
Two and twenty refers to the form of structure used by various hedge fund managers around the world for their compensation of the service or the work that they do. It is called as two and twenty because they charge two percent of the total asset value that they manage and additionally they are paid twenty percent of the profit earnings done by them for their clients. Some of the hedge funds earn more than 50% returns per year.
Considering all these things it means that such type of rule paves the way for lucrative earnings for the hedge fund managers. This kind of rule also encourages the managers to put in their complete efforts so that the hedge fund may perform exceptionally well. This way hedge fund manager will also get large chunk of money of the profit that he make for his clients. Hence, this kind of compensation structure may prove very beneficial for the investor as well since chances of getting better returns increases for him as well.
However, it is not necessary for any hedge fund manager to enter into any compensation agreement such as two and twenty compensation structure. They may also charge according to the flat fee method in which the amount that the manager earns remains fixed irrespective of the profits that he makes. Since, there is some amount of risk associated as well.
For Example: If a hedge fund manager has entered into a contract which follows two and twenty compensation structure but due to some reasons the hedge fund managed by him does not perform well. Then in that case that manager will get lesser amount as his compensation fee, since it is directly linked to the amount of profits that the hedge fund managed by him generates and that fee in some cases may even be less than the fee charged by various others managers through flat fee method.