[jyl]

Traditional asset managers (long-only) charge some percentage of assets under management, from 0.50% to 1.5% depending on account size and asset type. This creates a fairly stable revenue stream, which is important since the expenses of running an asset mgmt firm are fairly fixed.

If revenue went to zero during market declines, the business model would be incredibly cyclical. Every few quarters the firm would have a quarter of no revenue and thus major losses. I can't think of a lot of industries where quarterly revenue goes literally to zero on a regular basis! To compensate for that level of risk, the fee charged in up markets would be much higher. Further, in a prolonged bear market - e.g. 2000-2003 - all firms using this model would go out of business.

You can see why not a lot of asset managers are interested in this business model.

Hedge funds usually charge 2.0% of assets under management plus 20% of gains above the portfolio's starting point. Their claim is that, since they go long and short and use derivatives, they can make money in any market, even bear markets. IMO, the claim is questionable and the fee too expensive, but some investors are willing to pay it.