Hedge fund managers have the potential to earn much larger fees than other investment managers do. The two and twenty compensation structure allows the best-performing managers to earn hundreds of millions to billions of dollars in fees when they make big profits for their clients. However, when hedge fund returns barely surpass or even lag benchmarks, such as the Standard and Poor's (S&P) 500 Index, critics attack the two and twenty structure by saying that it unfairly rewards managers. From 2011 to 2015, average annual hedge fund returns of 1.7% lagged far behind average annual returns of 11% for the S&P 500 Index. The Barclays Hedge Fund Index, which measures the average return of all hedge funds, generated year-to-date (YTD) returns of 0.76% through the end of May 2016, compared to 2.59% for the S&P 500 Index. The rally in equities that began in early February 2016 exacerbated the disparity between hedge fund and market performance. Som...
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