The ‘Two and Twenty’ Rule: Hedge Fund Fees Explained for Aussies (2025 Guide)

Once the exclusive preserve of Wall Street, the ‘two and twenty’ fee structure is now a familiar—if controversial—feature of Australian hedge funds and private equity. As the financial landscape in 2025 evolves with new regulations and shifting investor expectations, understanding how this fee model works (and its real cost) is more important than ever for savvy Aussies keen on alternative investments.

What is ‘Two and Twenty’? The Basics and the Backlash

The ‘two and twenty’ model refers to a compensation structure used by many hedge funds and private equity managers:

• 2% management fee: An annual charge on the total assets under management (AUM), regardless of performance.
• 20% performance fee: A cut of the profits earned above a pre-agreed benchmark or hurdle rate.

For example, if you invest $1 million in a hedge fund that returns 10% in a year, the manager takes $20,000 (2%) as a management fee. If the fund generates $100,000 in profit, the manager claims $20,000 (20% of profits) as a performance fee—leaving you with $80,000 before taxes and other costs.

This structure has drawn criticism for rewarding managers regardless of performance and for potentially incentivising riskier strategies. However, proponents argue that the performance fee aligns manager and investor interests.

2025: Regulatory Shifts and Market Trends in Australia

This year, ASIC has sharpened its focus on fee transparency, with new disclosure rules taking effect from March 2025. Fund managers must now provide clearer, more detailed breakdowns of all fees—including the impact of ‘two and twenty’—in client statements and PDS documents. These changes aim to help investors make genuinely informed decisions, particularly as Australia’s pool of hedge fund assets surpasses $140 billion.

Key 2025 trends include:

• Pressure on fees: With more competition and greater scrutiny, some Australian funds are tweaking the model—offering lower management fees (as low as 1.25%) or raising hurdle rates before performance fees kick in.
• Performance hurdles: The days of 20% on all gains are fading. Many managers now must outperform the ASX 200 or RBA cash rate by a set margin before earning any performance fee.
• Increased investor sophistication: SMSFs and family offices are negotiating better fee deals, or opting for ‘founder share classes’ with reduced fees for early or high-volume investors.

For retail investors, this means more choice—but also more complexity. Understanding exactly what you’re paying for is critical, especially as some funds layer on additional administration or exit fees.

Real-World Examples: How ‘Two and Twenty’ Impacts Your Returns

Let’s look at two hypothetical Australian hedge funds in 2025:

• Fund A: Traditional two and twenty structure, no hurdle rate, $2 million invested, 8% annual return.
  Fees: $40,000 management + $32,000 performance (20% of $160,000 profit) = $72,000 total fees.
• Fund B: 1.25% management fee, 15% performance fee above a 5% hurdle, $2 million invested, 8% annual return.
  Fees: $25,000 management + $9,000 performance (15% of $60,000 excess over 5%) = $34,000 total fees.

The difference is stark—and underscores why fee scrutiny matters. Over a decade, the compounding effect of higher fees can erode hundreds of thousands from your final balance.

Notably, some emerging Australian funds are now offering zero management fee structures, charging only a performance fee. This radical approach, though rare, is gaining traction among fintech-driven managers looking to disrupt the old guard.

Should Aussies Avoid ‘Two and Twenty’ Funds?

Not necessarily. While the model has its critics, many top-performing funds still use it, and for some investors, access to unique strategies or uncorrelated returns justifies the cost. The key is to:

• Read the PDS and fee disclosures carefully, especially post-2025 regulatory updates.
• Ask about hurdle rates, high-water marks, and potential hidden fees.
• Compare net-of-fee returns, not just headline performance numbers.
• Negotiate where possible—especially if you’re investing significant capital.

In a world of ETFs and low-cost index funds, ‘two and twenty’ is no longer the only game in town. But for those seeking diversification, the right fund (with fair fees) can still play a valuable role in a well-constructed portfolio.