Felix Simon recently took a look on his blog at why the current hedge fund model doesn't work when the value of a hedge fund decreases.
If the value of a hedge fund is rising, then 2-and-20 works as intended: the fund manager gets paid more the more that the value of the fund goes up.
But if the value of the fund falls a lot, then suddenly the fund manager loses pretty much all of his incentives, things start going rather pear-shaped, and there's a good chance that fund investors will end up getting shafted by their fund manager.
What do you think of the situation? Do you agree with Felix?