This is exactly the rub. Managers take no haircut when the fund gets hammered. It is true that most managers won't take a profit on investor's money until they return to the "high water mark" of how much $$$ that investor originally put into the fund, but often times when a fund loses too much money, the manager simply closes it and opens another, therefore dodging the high water mark requirements.
But honestly, if rich people can't figure out that their fund manager is ripping them off, then to hell with them. Fund managers, at least, prey on people who are already rich. Better than a lot of other sleazes who take advantage of the undereducated and poor. I'm not saying it's right, I'm just saying that if you have enough money to write John Paulson a check, then you should know what you're doing. I can't say the same for an old woman in a bad neighborhood who was talked into refinancing her house of 50 years so she could take out cash to buy a conversion van. The people who preyed on her are far worse, in my mind, than your average fund manager who does nothing of virtue for his clients.
People (and actually it's institutions, mostly) who invest in hedge funds are sophisticated investors. They know full well what the managers are being paid and presumably feel they are worth it.
They were back when they were regularly producing 12-20% returns. That hasn't been the case for years. I can't imagine why anyone is still in a 2/20 hedge.
The fact that they keep their money with the manager? Sure there might be a few people who don't know what they are doing (lottery winners?) but if you have enough money to buy into a hedge fund, you more than likely are paying attention.
I don't see why you think A applies B at all here. I have worked both in institutional investment and in a hedge fund, and it's pretty fucking hard to read a term sheet for anybody.
But honestly, if rich people can't figure out that their fund manager is ripping them off, then to hell with them. Fund managers, at least, prey on people who are already rich. Better than a lot of other sleazes who take advantage of the undereducated and poor. I'm not saying it's right, I'm just saying that if you have enough money to write John Paulson a check, then you should know what you're doing. I can't say the same for an old woman in a bad neighborhood who was talked into refinancing her house of 50 years so she could take out cash to buy a conversion van. The people who preyed on her are far worse, in my mind, than your average fund manager who does nothing of virtue for his clients.