how two and twenty works
the 2 management fee is paid to hedge fund managers regardless of the fund s performance a hedge fund manager with 1 billion aum earns 20 million in management fees annually even if the fund performs poorly the 20 performance fee is charged if the fund achieves a level of performance that exceeds a certain base threshold known as the hurdle rate the hurdle rate could either be a preset percentage or may be based on a benchmark such as the return on an equity or bond index some hedge funds also have to contend with a high watermark that is applicable to their performance fee a high watermark policy specifies that the fund manager will only be paid a percentage of the profits if the fund s net value exceeds its previous highest value this precludes the fund manager from being paid large sums for poor performance and ensures that any losses must be made up before performance fees are paid out two and twenty adding up to billionsthe ten highest paid hedge fund managers collectively made 7 7 billion in fees in 2018 taking their combined net worth to 70 7 billion according to bloomberg 1 the table below shows the top five fund managers who raked in the most in 2018 the giant hedge funds founded by these fund titans grew so large that they generated hundreds of millions in management fees alone their successful strategies over many years if not decades have also earned these funds billions in performance fees while the steep fees charged by star hedge fund managers may be justified by their sustained outperformance the billion dollar question is whether the majority of fund managers generate sufficient returns to justify their two and twenty fee model 