The rise and fall of Mr Two-and-Twenty

‘Mr Ten Per Cent’ has long been a term of contempt. Indeed, finagling Hollywood agents’ decimation of their clients’ earnings resulted in one of the few successful exports of a Spoonerism to California — to explain the difference between a talent agent and a rooster (the latter ‘clucks defiance’). So why has it taken a global credit crisis, the collapse of several major investment banks, and Bernard Madoff’s alleged £50 billion fraud, for anyone to question the remuneration of the agent’s Wall Street equivalent: ‘Mr Twenty Per Cent’? Or, to use the full, double- barrelled monicker more befitting his Mayfair cousin: ‘Mr Two-and-Twenty’?

He is, of course, the hedge fund manager, who has been charging clients 2 per cent of assets under management plus 20 per cent of profits ever since Alfred Winslow-Jones, the father of the hedge fund industry, first had the chutzpah to introduce this fee structure on an absolute-return fund back in 1949.

Sixty years later, the performance of hedge funds that were supposed to buck, or at least neutralise, the market has been absolutely dismal. According to Hedge Fund Research, the average fund ended 2008 down more than 18 per cent. Both fixed-income and equity strategies failed — despite the strong performance of conventional bond funds and the obvious short-selling opportunities. ‘Convertible bond arbitrage’ funds were down 33.6 per cent, while ‘quantitative directional’ funds lost 22.9 per cent. Arguably worst of all, however, were the ‘funds of hedge funds’. Not for their 20.9 per cent fall — only 0.5 per cent of which can be attributed to Madoff exposure — but because they claimed an ability to outperform the wider hedge-fund universe through skilful fund selection. And they charged, for their trouble, an additional ‘1 and 10’, on top of the underlying ‘2 and 20’.