"Two" means 2% of assets under management (AUM), and refers to the annual management fee charged by the hedge fund for managing assets. "Twenty" refers to the standard performance or incentive fee of 20% of profits made by the fund above a certain predefined benchmark.
Compensation in the VC World
You'll often hear "2 and 20." Two percent is the typical annual fee to manage a fund while 20 percent is the performance fee from the fund. If you're running a $100 million fund, you'll get paid 2% annually in fees plus you get to keep 20% of whatever money you make in carry.
Though the show's characters, like hedge fund titan Bobby Axelrod, are fictional, many fans and critics have pointed out the striking similarities between Billions and the real-life rise and fall of SAC Capital, a hedge fund founded by legendary trader Steven A. Cohen.
A 20% carried interest is a performance fee charged to a limited partnership that is paid to the general partners of the limited partnership. Once the initial investment is paid back to the limited partners, the general partners are paid 20% of profits.
For example, if a hedge fund manages $100 million in assets, it would earn $2 million per year from the management fee alone. Additionally, if the fund generates $10 million in profits, the manager would take 20%, or $2 million, as a performance fee.
The typical carried interest rate charged to LPs is 20%—although some GPs can command higher rates. This means that after the LPs are repaid their original investment amount, the GPs will receive 20% of the profits from the fund, while the remaining 80% of profits are paid to the LPs.
But a leading character who remains consistent is Wendy Rhoades, the in-house performance coach. Keeping in mind that Wendy is a fictional character, it is interesting to analyze what makes her such an effective contributor to the success of the firm.
Rhoades is based on Preet Bharara, the United States Attorney for the Southern District of New York in Manhattan from 2009 to 2017, and the series was inspired by real-life federal prosecutions of financial crime. Bharara's 2013 prosecution of hedge fund manager Steven A. Cohen of S.A.C.
“Axelrod is not a hero or a villain; he's a complex human being who has a lot of contradictions and conflicts. He's someone who can inspire admiration and disdain at the same time.”
The 2 and 20 is a hedge fund compensation structure consisting of a management fee and a performance fee. 2% represents a management fee which is applied to the total assets under management. A 20% performance fee is charged on the profits that the hedge fund generates, beyond a specified minimum threshold.
The Rule of 40 – popularized by Brad Feld – states that an SaaS company's revenue growth rate plus profit margin should be equal to or exceed 40%. The Rule of 40 equation is the sum of the recurring revenue growth rate (%) and EBITDA margin (%).
Given the high failure rate among new companies, VC investors often refer to 100/10/1 rule of thumb , which involves reviewing 100 startup pitches, conducting due diligence on just ten of the 100 reviewed and selecting only one of the ten as an investment.
The 2 and 20 fee structure is a compensation model commonly used by venture capitalists. It involves a fixed management fee (typically 2% of the total asset value) and a performance fee (usually 20% of the fund's profits) that the VC manager receives.
Setting up a fund may vary depending on the stage your fund wants to invest in, the sector or industry, and the performance objectives for its portfolio companies. Full-time GPs typically require between $20 MM and $40 MM per head in fund size to cover salaries and expenses, assuming a 2% management fee.
Hedge funds are not without drawbacks
While access to many of the top-performing hedge funds require being a qualified purchaser investor, for the individuals who can invest, it's often worth it. These funds have much better long-term track records than what's generally available on the mass market.
Bobby Axelrod is a highly successful hedge fund manager and a master of finance and business strategy. He has a sharp mind and is able to quickly analyze and make decisions based on market trends and financial data.
Another Wendy subplot throughout “Billions” has been the peculiarity of her relationship with Axelrod. There's an unmistakable chemistry between the two. They are deeply involved with each other — something that irritated Chuck and Bobby's various partners to no end — but not in a sexual way.
Axe Capital is a group of hedge funds founded by Bobby Axelrod in 1992. The firm employed approximately 800 people in 2010 across its offices located in Westport, Connecticut, but located later to Manhattan, New York.
Wendy and Chuck's reconciliation is evident by how they are happily shown dining at a hibachi restaurant with their kids and are no longer at odds with one another. This is unlike in the previous seasons, where Chuck and Wendy had a strained relationship, eventually leading to their divorce.
Throughout the series, Axelrod's wealth is showcased through his lavish lifestyle, including luxury homes, expensive cars, and extravagant spending habits. His net worth is a testament to his skills as a financial strategist and his ability to navigate the complexities of the hedge fund industry.
Private equity funds have a similar fee structure to that of hedge funds, typically consisting of a management fee (generally 2%) and a performance fee (usually 20%). The performance fee, also known as carried interest, is taxed at the long-term capital gains rate if the assets have been held for more than three years.
As a fund manager, you generally receive a salary plus a bonus based off of the success of your fund. As a hedge fund manager, your firm may make as much as 20% of the returns of the investment, and depending on your seniority and your employer, you receive a portion of that on top of your annual salary.
VCs make money in two ways. Venture capitalists make money in two ways. The first is a management fee for managing the firm's capital. The second is carried interest on the fund's return on investment, generally referred to as the “carry.”