2 and 20: 2 and 20 vision

It wasn’t just traders who had incentive packages that amounted to one-way bets. Hedge fund managers had «heads-I-win, tails-you-lose» incentive structures too: the notorious 2 and 20 system. Every year, they receive a 2% fee for managing investors’ money – plus 20% of any profit. The crashing and burning of hedge funds is exposing the folly of this system. In the same way that traders’ one-way bets encouraged them to take big risks with banks’ capital, the hedge funds’ 2 and 20 system gave the...