How are hedge fund managers compensated?

Hedge fund managers are typically compensated through a two and twenty fee structure. This means that the manager charges a management fee of 2% of the assets under management and a performance fee of 20% of the profits earned by the fund. The performance fee is typically subject to a highwater mark, which means that the fund must first recover any losses before the manager is entitled to a performance fee. The compensation structure is designed to align the interests of the manager with those of the investors, as the manager only earns a performance fee if the fund generates positive returns.