SIE practice questionmediumHedge Funds — Fee Structure
The traditional hedge fund fee structure known as '2 and 20' refers to:
- AA minimum investment of $2 million held for 20 years
- BA 2% sales charge and 20% tax rate
- CA 2% management fee and 20% performance fee (incentive fee) on profits✓ Correct answer
- DA 2% redemption fee and 20-day notice period
Explanation
Why C — A 2% management fee and 20% performance fee (incentive fee) on profits
The '2 and 20' fee structure charges a 2% annual management fee on assets under management (regardless of performance) plus a 20% incentive (performance) fee on profits. These fees are significantly higher than mutual fund expenses. Some funds also have a 'high-water mark' provision, meaning the performance fee is only charged on new profits above the previous peak value.
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