
OPM
-N
ot Opium: Where Most of the Richest Are 127
HEDGE
YOUR
BETS
Do you like huge risks and returns? Are you a maverick? Fond of
big fees? Start a hedge fund. H edge funds are known as the 2
and
20
model because they charge 2 percent of managed assets annually
(i.e., give them $1 million, they take $20,000 yearly)- but also get
20 perce
nt
of
annual gains! If you' re good, lucky, or both, that adds
up quick.
Say you make one be
t-
some stock category will beat the mar-
ket in the next five yea
rs-
maybe big stocks, energy, or dru gs. You
bet big on that. You manage $100 million with a 2 and 20 contract.
Assume your bet averages 20 perc
ent
per year for five years.
• End of year one, your $100 million becomes $120 million. You
take 2 perc
ent
($2.4 million) plus 20 perc
ent
of the $20 million
gain ($4 million
)-
$6.4 millionp
rofi
t.
Year two starts and, minus your fee, assets are now $113.6 mil-
lion. Tack on anoth er 20 perc
ent
, take your 2 and 20 fee- $7.27
mil/ion profit.
•
In
year
five,
your profit is over$10.6 mil/ion!
Over five years, you get nearly $42 million in total fees! T hat's
just on the assets you starte d with. Gene rate high returns and you'll
get more clients with more assets.
No
w, suppose yo
u'r
e a regular fee-based manager making the
same b
et-th
e assets still grow 20 perc
ent
a year for five years,
but
you charge only 1.25 percent a year.
III
First year, your $100 million becomes $120 million. You get
1.25 per