We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What does "Two and Twenty" Mean?

Malcolm Tatum
By
Updated: May 16, 2024
Views: 11,590
Share

Two and Twenty is a term that is used to refer to a compensation strategy that is sometimes used by hedge fund managers. With this approach, the managers will structure the total compensation so that a portion is based on the actual performance of the assets involved. The name for the term implies that the manager will charge a flat rate in the amount of 2% for managing the asset on behalf of the investor, while also claiming 20% of whatever profits are generated by the investment as the remaining compensation.

One of the benefits of the Two and Twenty approach is that if the hedge fund does perform exceptionally well during the period under consideration, the manager stands to earn a higher return for his or her time and efforts. The flat fee of 2% is guaranteed, regardless of how the fund should perform, providing the manager with at least some compensation for the effort. Since the real money is made when the fund performs at a higher level, the manager will do everything that is legally possible to ensure maximum returns for the fund. When this happens, that 20% is obviously also higher, providing the manager with incentive to manage the hedge fund as competently as possible.

Hedge fund managers who enter into this type of compensation agreement do assume some degree of risk. Should the fund fail to perform well during a given period, the Two and Twenty approach may in fact mean that the hedge fund manager may take in less compensation than a manager who settles for a higher flat fee on the front end. In many cases, the possibility of this occurring is relatively low, since hedge funds that are managed properly typically post impressive returns on an annual basis. This means that a manager who goes with the Two and Twenty approach to compensation is likely to earn considerably more money each year than a manager who sticks with a flat percentage fee that is based only on total asset value and does not take into account the total profits generated during the period.

For investors, going with a Two and Twenty approach may also mean enjoying greater returns overall. Since this approach does provide the fund manager with additional incentives to handle the fund in a manner that is likely to produce the highest possible profits per annum, there is a good chance that even allowing for the additional 20% paid to the manager, the investor ultimately receives more returns than would have occurred if the fund had been managed with less attention and effort. From this perspective, the Two and Twenty approach has the potential to benefit everyone involved by providing the best possible returns from the hedge fund.

Share
SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.
Discussion Comments
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
Share
https://www.smartcapitalmind.com/what-does-two-and-twenty-mean.htm
Copy this link
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.