Key Takeaways
- • Institutional investors are pressuring hedge funds to adopt a "0-and-30" fee model (zero management fees, 30% performance fee) in place of the traditional "2-and-20" structure (2% management fee, 20% performance fee).
- • Commonfund, a $24.1 billion Connecticut-based manager overseeing foundations and endowments, is leading the charge for fee restructuring, with CEO Mark Anson arguing that confident managers should embrace higher performance fees as an opportunity to demonstrate investment skill.
- • The shift reflects years of mediocre hedge fund performance coupled with investor fatigue over paying substantial management fees regardless of returns—in 2018, investors paid millions in fees despite most funds posting dismal results.
- • Industry observers note that investors are willing to pay high fees only when hedge funds deliver strong performance; the current fee pressure signals a broader loss of confidence in the traditional value proposition of the hedge fund model.
- • The movement away from "2-and-20" represents a fundamental renegotiation of the risk-reward alignment between managers and investors, with performance increasingly the sole justification for compensation.
Summary
The hedge fund industry faces mounting pressure from institutional investors to abandon the "2-and-20" fee model that has underpinned manager compensation for decades. In its place, major institutional players are advocating adoption of a "0-and-30" structure—eliminating management fees entirely while raising performance fees to 30%. This represents a dramatic shift in how the industry compensates for capital deployment and risk management.
Commonfund, managing $24.1 billion for foundations and endowments, stands at the forefront of this movement. CEO Mark Anson has publicly stated that the firm is "trading on some of the hubris of the hedge fund managers themselves," believing that confident performers will accept the new structure as validation of their investment acumen. At Commonfund's 2019 outlook breakfast in New York, Anson articulated the investor perspective: "We would prefer to pay no management fee, but give them a higher incentive fee." This framing attempts to reposition the fee negotiation as an opportunity rather than a constraint, appealing to manager confidence while fundamentally restructuring compensation away from assets under management toward pure performance.
The impetus for this shift stems from sustained underperformance and investor dissatisfaction. Throughout 2018, hedge fund investors paid substantial management fees to managers whose funds delivered poor returns—a disconnect that has eroded the industry's credibility. The traditional "2-and-20" model was justified by the promise that hedge funds would generate alpha even in down markets, offsetting their higher cost structure relative to passive alternatives. Years of mediocre performance have weakened that value proposition considerably.
Antonio DeRosa, head of advisory at Jefferies, acknowledged at Context Summits in Miami that the underlying principle driving this negotiation is straightforward: investors do not object to high fees when performance justifies them. The logical corollary—that they increasingly resist paying for management fees when alpha is absent—has become the industry's central problem. This tension reflects a broader institutional shift toward performance-based compensation models across alternative asset management.
The movement represents not merely a fee reduction but a fundamental realignment of risk and incentive structure. By eliminating the management fee cushion, hedge fund managers assume greater business risk while maintaining the potential for substantial upside through elevated performance fees. Whether the industry broadly accepts this restructuring remains uncertain, but the pressure from major institutional allocators signals a durable shift in fee negotiation dynamics that threatens traditional compensation models across the hedge fund sector.
Commonfund, managing $24.1 billion for foundations and endowments, stands at the forefront of this movement. CEO Mark Anson has publicly stated that the firm is "trading on some of the hubris of the hedge fund managers themselves," believing that confident performers will accept the new structure as validation of their investment acumen. At Commonfund's 2019 outlook breakfast in New York, Anson articulated the investor perspective: "We would prefer to pay no management fee, but give them a higher incentive fee." This framing attempts to reposition the fee negotiation as an opportunity rather than a constraint, appealing to manager confidence while fundamentally restructuring compensation away from assets under management toward pure performance.
The impetus for this shift stems from sustained underperformance and investor dissatisfaction. Throughout 2018, hedge fund investors paid substantial management fees to managers whose funds delivered poor returns—a disconnect that has eroded the industry's credibility. The traditional "2-and-20" model was justified by the promise that hedge funds would generate alpha even in down markets, offsetting their higher cost structure relative to passive alternatives. Years of mediocre performance have weakened that value proposition considerably.
Antonio DeRosa, head of advisory at Jefferies, acknowledged at Context Summits in Miami that the underlying principle driving this negotiation is straightforward: investors do not object to high fees when performance justifies them. The logical corollary—that they increasingly resist paying for management fees when alpha is absent—has become the industry's central problem. This tension reflects a broader institutional shift toward performance-based compensation models across alternative asset management.
The movement represents not merely a fee reduction but a fundamental realignment of risk and incentive structure. By eliminating the management fee cushion, hedge fund managers assume greater business risk while maintaining the potential for substantial upside through elevated performance fees. Whether the industry broadly accepts this restructuring remains uncertain, but the pressure from major institutional allocators signals a durable shift in fee negotiation dynamics that threatens traditional compensation models across the hedge fund sector.
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