If they have fixed costs, why is it a percentage based fee?

Why not just be upfront with a fixed dollar value per year of fees for that part?

Prices of products in general are not based on costs, they are based on what share of the cake is available to take.

Fees such as trading costs are a percentage of trading volume.

Therefore, the more money you are managing, the higher your trading costs. (i.e those costs are "fixed" but its a "fixed percentage" rather than a static number.)

I highly doubt trading costs are part of the 2% management fee.

What else would they be part of? It's an operational cost.

In my experience they absolutely are part of the 2% fee. Why do you think they aren’t?

In that case, how can the rate be fixed or does that mean that the hedge fund limits its trade turn-over. In other words, if your trading fees are 0.2% and your trading volume is 10 times the capital raised, you already burned through your management fee.

That’s why they are fixed percentage not fixed. Trading fees go up with the amount of capital moved but mostly in a linear fashion.

Calculating your trading costs (and usually more importantly slippage) is absolutely table stakes for a fund that trades.

For most funds that’s relatively easy as the trading component is a cost center that you can outsource for predictable prices.

For funds that aren’t treating trades as cost centers, well it’s presumably part of what you are selling so you better be good at it.

"incentivises the alpha"

If they knew where the alpha was, they would go get it.

If they could make alpha happen, they would do that.

Carrot? Stick?

Take 40% and raise capital for the VC operations as a separate transaction than from the LPs, of course.

Efficient markets.

How would you raise capital for operations separately from LPs? What's the upside of that for any investor? Do they get part of fund returns? Nobody is giving any kind of fund any money unless they get part of the fund returns for it.

They would take equity in the fund, of course.

So they take 40% of future portfolio returns, and then sell half of that up front in return for investment of 2% of total funds managed and end up exactly where we are now but with added complexity....

Strangely the 0.05% management fee I pay covers the fix costs of my mutual fund.

A market is very liquid and trading is cheap, and the relevant starts are publicly aggregated. Transactions for an index fund are probably billions a day in rebalancing, withdrawal, and purchases. Startup transactions take $x0,000+ in legal fees, travel costs, due diligence from domain experts, and weeks of labor for single or double digit million dollar deals. Are you seriously comparing the two?