Beyond being recognized as one of the founding fathers of hedge funds, Alfred Winslow Jones (see AllAboutAlpha’s tribute here), who would have hit the lofty age of 109 last month, in 1949 also introduced a concept not seen before: an incentive fee structured as a function of realized profits, with a set management fee to offset operating costs.

Sixty years on, the concept of “2 and 20” (bumped up from “1 and 20” about a decade ago, presumably due either to inflation, greed or both), has held as the hedge fund industry benchmark. While variations have emerged over the years, ranging from “1 and 10” for funds of hedge funds to “5 and 30” for highly sought after, pedigreed enterprises, most managers have stuck with it, for the main reason that most investors have been willing to pay it.

One of the reasons for this is that hedge fund fees (unlike mutual fund fees) respond immediately and proportionately to performance.  Critics who cry foul that hedge fund fees seem to stay the same in the face of lackluster returns often ignore the fact that last year’s poor returns mean that many hedge funds are charging “2 and nothing” this year.  Indeed, this recent article shows that some funds have gone beyond this and actually provided investors with a performance fee holiday – regardless of how 2009 turns out. More…