"The problem happens when the size of the fund gets too large and there aren't enough deals for the money available." That's a big problem, though. And it's ju

"The problem happens when the size of the fund gets too large and there aren't enough deals for the money available." That's a big problem, though. And it's just one ugly facet of the overall clusterfork that is the investment management industry. My investment firm has a 5/50 fee schedule, instead of the standard 2/20 that most private equity firms and hedgies use. [The first time I said that to a potential client, they literally tried to run out of my office - but couldn't because they were hyperventilating too much. ;-) ] To explain, we take 50% of any outperformance beyond an appropriate benchmark (S&P or DJIA index fund, for example) with a 5 year lockup. We charge an early withdrawal fee if the client wants to pull their money during the lockup, but there are no management fees. We therefore have no incentive to grow our AUM beyond what we can invest wisely. Problem solved. We also don't have to justify how we're "incentivized" out of the corner of our mouth like most firms do, because we only get paid if we outperform. [FYI: Starving if you fail is an incentive not to fail. Having to downgrade which luxury sports car you drive because your carry was weak is not. Declaring bankruptcy if you fail is an incentive not to fail. Having to postpone your purchase of a luxury vacation home until next year is not. I personally wouldn't want to pay some bozo for just coasting along with my money - I would want results. Why should my client's expect less?] I like to say "5/50 instead of 2/20" during client presentations, because I like to see the shock and/or outrage on client's faces before I explain everything. I'm sick that way. Everyone assumes I mean a 5% management fee and 50% of profits. Fortunately, no one has had a heart attack before I explain yet. I love performance-based compensation in ALL industries. Unfortunately, most industries have at least some restrictions on using it...including this one. The greedy and incompetent always fight to maintain the status quo, and sometimes government 'protections' backfire.