If you have ever heard the term "2 and 20" and wondered what it means, here is the simple version.
It is a fee structure commonly used by hedge funds and private investment funds, and it has two parts.
The first part is the 2% management fee. This is an annual fee charged on your total invested capital, regardless of how the fund performs. It covers the cost of the team actively managing your investments, sourcing deals, conducting due diligence, and handling everything that happens behind the scenes. At Constitution Lending, this is charged quarterly for our Credit Fund at 0.50% per quarter, so there are no large lump sum deductions.
The second part is the 20% performance fee. This one only applies when you make money. If your investment generates a profit, the fund takes 20% of those profits as a fee. If there are no profits, there is no performance fee. It is that straightforward.
There is one more important detail: the high water mark. This protects you in down years. If your account ever loses value, we cannot collect a performance fee the following year until your account has fully recovered and exceeded its previous peak. We only earn a performance fee on new profits, never on recovering ground that was already lost.
The bottom line is that the 2 and 20 structure is designed to align our interests with yours. The management fee keeps the lights on. The performance fee means we only win when you win.