I used to think that those that ran hedge funds got rich because of their incredible returns. Then I heard about the 2 and 20 fee structure that most hedge funds charged. The typical hedge fund fee structure (historically) is 2% of assets under management and 20% of all positive returns. Therefore, if you gave a hedge fund $1 million and they got a 10% return on it, their total take in fees would be:
[$1 million * 0.02] + [($1 million * 0.1) * 0.2] = $20,000 + $20,000 = $40,000.
This represents $20,000 for managing your money and $20,000 for their positive performance (i.e. the $100,000 they earned with your money). Despite their $40,000 fee, you would end up $60,000 richer than before you met them. Good deal, right?
However, what if I told you that in less than 20 years the hedge fund would have more money than you (regardless of the size of your initial investment). Shocking, but true.
More here – Of Dollars And Data