There are some funds that have much better incentive structures than the standard 2-and-20. In particular, some funds charge an incentive fee over a hurdle rate of say, 6%. Even more fair to investors - this hurdle rate compounds and is subject to a high water mark - where the management company must beat the previous highest amount attained by the fund by the compounding hurdle rate. Additionally, some managers also credit any (usually lower) management fee to the incentive fee.

The downside is that the incentive fees get much more complicated - too complicated to lay out here. I've modeled the scenarios in the following Google Spreadsheet (feel free to copy and play around with this): https://docs.google.com/spreadsheets/d/1RlB4iwg42dEa-atdti4H...

If you do check it out:

Notice that in the [high ret] scenarios, there's little difference in total fees charged between the "fair" 6% hurdle and the 2-and-20 scenario. However, in the [low ret] scenario, the fee difference can be quite substantial: $227k for 2-and-20 vs $70k for the 6% hurdle scenario. And the resulting

Please feel free to copy and play with the values if you'd like. I'd love to discuss in more depth.

The 6% hurdle is a reasonably fair expectation of annualized stock market returns going forward for next 10-20yrs. If there's sufficient interest please reply to this comment and I can detail reasons why, most likely in a full fledged post.

(Over the next 3-5 years, I believe "market returns" - defined as those received from SPY ETF - are likely to be less than 6% from this point (Dec 23 2016), possibly significantly so.)