Analysis of "2 and 20" Fee Structure Prevalence in Modern Fund Management

This analysis is based on a Reddit discussion [0] questioning the prevalence of the traditional “2 and 20” fee structure (2% management fee and 20% performance fee) that Warren Buffett has criticized, noting discrepancies between reported high fees and lower fees mentioned by Reddit users.

The fund management industry has undergone significant fee structure transformation over the past decade. While the “2 and 20” model once dominated hedge fund compensation, comprehensive industry data reveals substantial fee compression across all segments. According to IG Prime’s 2025 industry survey, the traditional model generated $1.8 trillion in fees from $3.7 trillion of gains (approximately 49% of gross gains) throughout the industry’s history [1], but investor pressure has forced fundamental changes.

Current industry averages show management fees have fallen to 1.35% and performance fees to 16.01% [1], representing 32.5% and 20% reductions respectively from traditional standards. This compression explains the Reddit user’s observation about lower fees - most large institutional investors now pay significantly less than 2 and 20, while smaller investors or those accessing premium strategies may still face higher rates.

The industry has developed a bifurcated fee structure based on investor type [2]:

• Institutional investors: Average 1% management fee and 15% performance fee
• Smaller/individual investors: Average 1.5% management fee and 20% performance fee

This segmentation directly addresses the Reddit user’s question about underrepresentation of high-fee clients in online discussions. Most Reddit users likely reference institutional allocations or newer fund structures, while high-fee clients (typically smaller investors or those accessing capacity-constrained strategies) are indeed underrepresented in such forums.

Fee structures vary significantly by region and strategy:

• Asia maintains the highest performance fees at 20.24%
• UK has the lowest at 17.75%
• US and Europe average 18-19% [3]
• Multi-strategy funds often command premium pricing due to complexity
• Private equity maintains higher fees than hedge funds, with buyout funds averaging 1.74% management fees [4]

The industry has developed several alternatives to traditional 2 and 20 [3]:

• “1 and 10” model with lower fees
• Flat fee structures without performance components
• Sliding scale fees that decrease as AUM increases
• Hurdle rates requiring minimum returns before performance fees apply
• Cash hurdles tying fees to Treasury bill yields

Several forces drive the shift away from traditional fee structures:

1. Performance Pressure
   : Many hedge funds have underperformed benchmarks, making high fees harder to justify [1]
2. Competition
   : Rise of low-cost passive investing alternatives [3]
3. Investor Sophistication
   : Institutional investors possess greater bargaining power and fee sensitivity
4. Regulatory Scrutiny
   : Increased SEC focus on fee disclosure and fairness [3]

The trend toward fee compression is likely to continue, with 44% of managers considering fee structure changes [1]. Goldman Sachs research shows nearly half of investors want hurdle rates, but only 30% of managers currently offer them [1], indicating significant opportunity for fee innovation and competitive differentiation.

The traditional “2 and 20” fee structure is becoming increasingly rare in its original form. While 74% of hedge fund managers still levy some form of management fee similar to the 2-and-20 model [1], actual rates are substantially lower. The industry has evolved toward a segmented approach where institutional investors pay significantly less than smaller investors, explaining the discrepancy between Reddit user reports and continued references to high fees.

Warren Buffett’s criticism of high fees is well-validated by performance data. His famous 2007 bet that a simple S&P 500 index fund would outperform hedge funds proved correct—the index fund returned 7.1% annually over 10 years, while five funds-of-hedge-funds returned only 2.2% after fees and taxes [5].

Private equity has maintained higher fees compared to hedge funds, with venture capital charging the highest management fees at 2.05-2.24% [4], suggesting that alternative investments may be the last bastion of traditional fee structures.