How does the classic 2 and 20 hedge fund fee structure actually work?

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AcadiFi · Accepted Answer

The '2 and 20' fee structure has two layers: a management fee of roughly 2% of assets under management charged annually regardless of performance, plus an incentive fee of 20% of profits above any hurdle or high-water mark. Consider Silverbrook Macro, a $500M hedge fund, fee structure 2/20 with no hurdle and a high-water mark. Year 1 starts with $500M. Management fee: 2% × $500M = $10M, typically charged monthly or quarterly based on beginning-of-period assets. Year 1 gross return: +18%. The fund grows to $590M before fees. Management fee of $10M leaves $580M. Profit above starting NAV (for incentive fee purposes) = $580M − $500M = $80M. Incentive fee = 20% × $80M = $16M. Ending NAV = $580M − $16M = $564M. Net return to investor = 12.8%. ```mermaid flowchart LR A[Start $500M] --> B[Gross $590M] B --> C[Mgmt fee
-$10M] C --> D[$580M] D --> E[Incentive 20%
-$16M] E --> F[Net $564M
12.8%] ``` Investor paid $26M total fees on 18% gross, cutting the return by 520 bps. Variations: some funds charge '1.5 and 15' or '1 and 30'; funds of funds layer fees on top; some use 'management and incentive' on committed capital (PE-style). The industry trend since 2016 has been fee compression — median hedge fund fees now run closer to 1.5/17. Investors should always look at NET returns and understand that high-water marks prevent double-charging on recovered losses but don't stop management fees from accruing during drawdowns.

How does the classic 2 and 20 hedge fund fee structure actually work?

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