Two and Twenty is a term used to refer to the traditional fee structure adopted by hedge fund managers. Two refers to the standard management fee collected annually by the fund manager. This fee usually amounts to 2% of total fund assets and is meant to cover the costs of managing the fund such as rent, salaries of professionals and other administrative expenses. The Twenty is a performance fee that the fund manager collects when profits exceed a certain hurdle rate. This fee typically amounts to 20% of the profits generated by the fund, enabling the fund manager to share in the upside of their investment decisions.

This lucrative fee arrangement has resulted in hedge fund managers pocketing large sums of money regardless of the performance of their fund. In some cases, these managers have become multi-millionaires or even billionaires as a result of their seemingly endless profits. There has been controversy surrounding this model in recent years however, as many investors and even politicians have questioned the fairness of this type of fee structure.

To protect investors interests, most hedge fund managers have adopted the high watermark fee approach. This means that the fund manager will only be able to collect the 20% performance fee based on value increase over its previous highest value. This ensures that any losses suffered by investors are not accompanied by profit siphons by the fund managers as well.

At its core, the Two and Twenty fee structure has been an incredibly powerful incentive for fund managers to increase returns and make wise investments on behalf of their clients. However, it is important to ensure the process remains transparent, fair and legal in order for investors to be protected from any undue stress and strain.