CFA Level I · CFA Level I Exam · Hedge Funds
A hedge fund charges a 2% management fee on year-end assets under management and a 20% incentive fee. The fee structure is described as "2 and 20". The 20% most likely represents:
The 20% is the incentive fee, which is a share of the profits the fund earns. It rewards the manager for performance. The 2% is the management fee charged on assets, whereas the incentive fee depends on returns and is not charged on committed capital or assets irrespective of performance.
- Aa share of profits earned by the fundCorrect
- Ba charge on committed capital
- Ca fee on total assets regardless of performance
Explanation
In a "2 and 20" structure, 2 is the management fee on assets and 20 is the incentive (performance) fee, a share of profits. It is tied to performance, not to committed capital or to total assets regardless of results.
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