A hedge fund starts the year with $100 million in assets. The fund earns a 15% return and charges 2% management fee and 20% incentive fee. Assuming the management fee is deducted first, what is the total dollar amount of fees collected?

Why A — $4.6 million

Management fee: 2% x $100M = $2.0M. After the management fee, assets are $98M. The 15% gross return on $100M = $15M, minus the $2M management fee = $13M net gain. Performance fee: 20% x $13M = $2.6M. Total fees = $2.0M + $2.6M = $4.6M. Some funds calculate fees differently, but this method of deducting management fees before calculating incentive fees is common.