Even when this is true, it doesn't necessarily solve the problem. Say you're 28 years old and you're running your first fund. You have a net worth of $500k (because you worked 100-hour weeks as a banker for a few years, paid your student loans, and saved up). You put $400k into your fund and raise $50M. You charge a 25% performance fee.

If you get 10% returns, that's $1.25M for you (at a possibly low tax rate, too) plus $40k on your own investment. If you lose 20%, you're out $80k. What's your incentive here?

Only the new ones.