Management Fee and Performance Fee
The two main fee components a fund typically charges: a management fee based on total assets under management, and a performance fee based on a share of investment profits generated.
A management fee is a recurring fee, typically charged as a fixed annual percentage of total assets under management, covering a fund's ongoing operational costs regardless of whether the fund performs well or poorly in a given period. A performance fee, by contrast, is charged only on a share of the actual investment profits a fund generates, aligning the manager's compensation more directly with delivering genuine positive returns rather than simply managing a large asset base.
Crypto hedge funds (see Kaavon's "Hedge Fund (Crypto)" glossary definition) commonly charge both fees together in a structure sometimes informally called "two and twenty" — a 2% annual management fee plus a 20% performance fee on profits — though the specific percentages vary considerably by fund. A performance fee is typically paired with a high-water mark (see Kaavon's "High-Water Mark" glossary definition) provision, which prevents the manager from collecting a performance fee on the same gains twice if the fund's value first drops and then merely recovers back to a previous peak.
Examples
- A crypto hedge fund charging a 2% management fee and a 20% performance fee collects the management fee regardless of performance, but only collects the performance fee on actual profits generated.
- A performance fee is typically paired with a high-water mark provision, preventing a manager from being paid twice on the same gains if the fund's value first falls and then merely recovers.