Series 7 practice questionmediumAlternative Investments — Hedge Funds
A hedge fund charges "2 and 20." This fee structure means:
- A2% annual management fee and 20% performance fee on profits✓ Correct answer
- B2% front-end load and 20% back-end load
- C2% redemption fee and 20% annual expense ratio
- D20% management fee and 2% performance fee
Explanation
Why A — 2% annual management fee and 20% performance fee on profits
The "2 and 20" fee structure is the traditional hedge fund compensation model: a 2% annual management fee charged on total assets under management, plus a 20% performance fee (incentive fee) charged on investment profits. Some funds also include a high-water mark provision, meaning the performance fee is only charged on profits that exceed the fund's previous peak value.
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