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  • Writer's pictureMatt DeLong

How much of the profits do hedge fund managers make?

Typically 2% of assets under management AND 20% of the profits under traditional compensation models. However, those compensation formulas are being challenged — notable Warren Buffett speaks out against a 2 & 20 compensation structure.

If a $1billion dollar fund earns 12% for the year

2% flat fee: $20m (regardless of performance)

20% carried interest: $24m

TOTAL: $44m

As you can see, even with just 2% of assets, fund managers can make a substantial amount of money performing poorly and just raising more money each year. Unfortunately, with this fund structure, this causes fund managers to be better sales people than investors.

For funds with $50b AUM, multiply the numbers above by 50! The fees are typically collected on a quarterly basis with a “high water mark”. So the fund has to exceed the previous high water mark to collect additional fees from each LP.

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