>> two-and-twenty means 2% of assets under management every year plus 20% of any profit and 0% of any loss. why people agree to those terms is beyond me.
that is true, but running a martingale-ish strategy will often just set a new high water mark every year... until it doesn't.
hedge funds often make a lot more from the 2% than from the 20%. if you grow your AUM into the billions, charging 2% of that in yearly fees is incredibly lucrative. if you have a few years of above-market returns and good salesmanship, you can grow your AUM quickly.
when the streak ends, the clients lose way more than the managers, who mostly just lose reputation.
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personally, i'd only invest in low-fee passive funds like vanguard etfs, and active funds where the managers have a high fraction of their own personal capital in the fund.
There is usually also a watermark to make it less one-sided. See here: http://www.investopedia.com/terms/h/highwatermark.asp