A hedge fund begins the year with $120 million and earns a 25% return for the year. The fund charges a 1.5% management fee on end-of-year fund value and a 15% incentive fee on the return, net of the management fees, that is in excess of a 6% fixed hurdle rate. The fund's investors' return for the year, net of fees, is closest to:
The $120 million grows by 25% to $150 million [= $120 million × (1 + 0.25)]. The management fee is $2.25 million (= $150 million × 0.015), leaving $147.75 million, net of the management fee, or nan increase of $27.75 million over the beginning value of $120 million. The 6% hurdle rate requires an increase of $7.2 million (= $120 million × 0.06), so the fund has earned $20.55 million (= $27.75 million － $7.2 million) over the hurdle rate, net of the management fee.