Hedge fund math = regular math. When you charge 2 and 20 but have slim or negative returns, the 2% dominates the 20%. Investors don't like the fixed part of fees, and want to be able to claw back some of the variable fees when later years are bad. Note that this already happens in reverse due to high-water marks (e.g. if you lose 20% one year and then make 25% the next, you don't get a performance fee since you're just back to even). Some investors would like to be able to do the same but in reverse.

In my mind, this is a business like any other. With more competition the price goes down. For HF that means lower fixed fees, higher hurdle rates, lower variable fees, or some combination. On top of that, you can look at it like any risky contract. If you want lower fixed fees, you'll have to pay more in variable fees, and your expected cost will be higher as the managers bear more risk