Two and twenty (2/20).

In plain English

Two and twenty is shorthand for a fee structure where a fund manager takes an annual management fee of about 2 percent of assets plus a performance fee of about 20 percent of gains. The management fee is charged whether the fund makes money or loses it, because it pays for staff and operations. The performance fee, often called carry, is only taken on profits, and it is usually limited by a high-water mark or a hurdle rate. The exact numbers vary by fund and are negotiated, so the phrase describes a template rather than a fixed price. Both fees come out before an investor sees a return.

01Why it matters

Fees compound in the same direction as returns, against you, so a fee structure like this can absorb a large share of the gains an investor was counting on over a long holding period.

02The math, step by step

Say $1,000,000 is invested and the fund gains 10 percent, or $100,000, before fees. The 2 percent management fee is $20,000. The 20 percent performance fee on the $100,000 gain is $20,000. Total fees are $40,000, so the investor keeps $60,000, an effective return of 6.0 percent instead of 10 percent.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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