Why 2 and 20 Fees May Soon Be History

June 24, 2019 | Hedge Funds
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According to Hedge Fund Research, only 30% of hedge funds now charge the 2 and 20 structure

An unimpressive performance record, investor resistance to high fees and difficult industry conditions are squeezing hedge funds across the board. Average management fees crashed to a record low of 1.43% in the first quarter of 2018, according to Hedge Fund Research.

But there’s a new kid on the block. A “first-loss” fund structure puts the onus of some of the losses on the hedge fund manager.

How first-loss funds work

In this structure, a hedge fund manager stands alongside the investor when it comes to losses. Generally, in these funds, the manager also invests her own money, and agrees to bear some of the losses up to a pre-defined limit, e.g. 10%.

In the event the fund makes a profit, the manager gets a cut – which could be much higher than 20%.

Not everyone has ditched 2 and 20

Billionaire John Paulson used the first-loss structure when availing funding from Prelude Capital, Topwater Capital and Boothbay Fund Management. Paulson & Co put up its entire asset base to cover for the eventuality of a 10% loss. The flip side? If the fund makes a profit, Paulson gets to keep 55%.

Element Capital is another firm that is bucking the 2-and-20 trend. According to Bloomberg, the firm recently reported it will charge 2-and-40 while it scales back its operations and size of its funds.

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