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An ISA (Individual Savings Account) is a savings account available to UK residents on which the return is tax-free and which need not be declared on the investor’s tax return. All income (dividends and interest) and all capital gains within the account are free of tax. For the current year, 6 April 2024 to 5 April 2025 the overall investment limit is £20,000 (excluding the British ISA which has a separate £5,000 limit).

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The Reaction to the 2 and 20 Analysis

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There are many who disbelieve the simple arithmetic of the impact of hedge fund style 2 and 20% fees on the division of the investment proceeds between investor and fund manager. As demonstrated, if 2 and 20 were applied to Warren Buffett's investment performance, over 90% of the eventual value of the fund would accrue not to the investor, but to the manager.

There were also many who disagreed with the methodology of calculating the amount which accrues to the manager based upon the assumption that the 2 and 20 fees are invested in the fund and compound at the same rate as the investor's stake. I think this is an uncontroversial assumption and certainly reflects the practice in some actual hedge funds.

But regardless of what the manager does with the proceeds or how it's calculated, the simple fact is that under the one scenario you'd have $4.3m and under the other you'd only have $300k. Some commentators seem to think this is acceptable. This industry needs change.

Someone also pointed out that the example of Warren Buffett charging 2 and 20 is not original. Although I calculated the example from scratch, it was covered by John Kay in an article on this subject.

What is original is that I am not just writing about it, I have set up a fund management business to do something about it. Or as someone once said "Predicting rain isn't what counts. Building an ark is."