3. Standard compensation models motivate Money Managers to add more assets under management, but size often hurts returns. This contributes to the ‘winner take all’ trend in which we see steadily growing concentration of AUM into the largest money managers (See Picture 3). For example, venture capital funds earn on average two-thirds of their compensation from management fees, not carry. However, there is an inevitable tension between size and returns. Large hedge funds over time hit liquidity limits and start impacting market pricing when they trade, losing their ability to exploit arbitrage opportunities. Similarly, large VCs earn lower returns than small VCs, who in turn earn lower returns than angel investors; angels writing small checks have among the highest it is true that large size does create certain proprietary advantages, e.g., some large fund of funds negotiate preferential management fees from funds in which they invest. Picture 3: US Net Cash Flows to Money Managers The largest asset managers capture nearly all net flows into the US market; net flows to other managers are down significantly.