Lesson 4 of 5 6–9% of the exam

By Daniil Tarakanov Updated Oct 21, 20262027 curriculum

Calculating returns after fees: management, incentive, hurdle and high-water mark

Work out the management fee on the stated asset base, then the incentive fee on the stated profit (gross, net of the management fee, above a hurdle, or above the high-water mark), add them, and divide what is left of the gain by the starting capital. The fee terms decide the investor's return.

12 min cram, 44 min full read. Based on the 2027 CFA® Program Level I curriculum, Alternative Investments, Learning Module 2. Also part of the 2026 curriculum, so it applies to the November 2026 exam too.

Tailor this to you: take the self-assessment

Before this: Fees and waterfalls: hurdle, catch-up, high-water mark, clawback, Leverage, redemptions, lockups and gates

On the exam

Calculate and interpret alternative investment returns both before and after fees

Calculate and interpret returns before and after fees. Expect a two or three step calculation: read every fee term in the question before you start (which assets under management, or AUM, independent or net, hurdle, high-water mark).

How deeply to learn each part

Know the idea: Understand it in general. It frames other topics, but you will not calculate with it.
Use it: Understand it well enough to solve a question with it. Recognize when it applies.
Memorize: Learn it by heart. The exam will not give it to you.

You know this one. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still do.

You tested strong here. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still know it.

What is the recipe for an investor’s return after fees?

Hedge funds, private equity and real estate funds usually charge a management fee (a percentage of assets under management) plus an incentive fee (a percentage of profit). The investor’s return depends on exactly how each fee is defined, so every question is solved the same way.

Management fee = $m$ × AUM, using the start or end of period AUM as stated.
Incentive fee = $p$ × the fee base the question describes, and never less than zero.
Investor return = (gain − total fees) ÷ starting capital.

Management fee Use it

F = m \times \text{AUM}

What the incentive fee is charged on

Incentive fee = p × fee basethe question tells you which base; the management fee is charged either way

Gross gain Memorize P₁ − P₀; management and incentive fees calculated independently
Gain net of the management fee Memorize P₁(1 − m) − P₀; a lower fee for the investor
Gain above a hard hurdle Memorize P₁(1 − m) − P₀(1 + h); only the excess is charged
Value above a high-water mark Memorize P₁(1 − m) − H; nothing is charged below the mark

With fees calculated independently , the incentive fee is on the whole gross gain and the management fee is simply added. Write $P_0$ for the start value, $P_1$ for the end value before fees, $m$ for the management fee rate on year-end value and $p$ for the incentive rate.

Total fees, calculated independently Use it

R_{GP} = P_1\,m + \max\left[0,\; (P_1 - P_0)\,p\right]

Investor net return Use it

r_i = \dfrac{P_1 - P_0 - R_{GP}}{P_0}

How do the three versions compare in one year?

A fund starts at USD 200 million. Over the year it grows to USD 236 million before fees, a gross return of 18%. The management fee is 1.5% of year-end AUM and the incentive fee is 20%.

Rearrange itFees calculated independently: solve for any input

The question asks for

A fund starts the year at USD 200 million and ends it at USD 236 million before fees. It charges 1.50% of year-end value and 20.00% of the gain, calculated independently. The total fees, in USD millions, are closest to:

Starting value, P₀ (USD m)Ending value before fees, P₁ (USD m)Management fee on ending value, m%Incentive fee on the gain, p%

R_{GP} = P_{1} m + max [0, (P_{1} - P_{0}) p]

236 × 0.015 + 0.2 × max(0, 236 − 200) = 10.74

Total fees, R_GP (USD m)10.74

On your calculator

236×0.015=STO1management fee
236−200=×0.2=STO2incentive fee
RCL1+RCL2=10.74

STO store · RCL recall a stored number

236ENTER0.015×STO1management fee
236ENTER200−0.2×STO2incentive fee
RCL1RCL2+10.74

ENTER enter (on the HP, puts the number on the stack) · STO store · RCL recall a stored number

With an incentive fee net of the management fee , the manager is paid only on what is left after the management fee. That is better for investors, because the incentive fee base is smaller.

Total fees, incentive fee net of the management fee Use it

R_{GP} = P_1\,m + \max\left\{0,\; \left[P_1(1 - m) - P_0\right] p\right\}

A hurdle rate adds another reduction. With a hard hurdle $h$ , the incentive fee is charged only on the value above the hurdle: the starting capital grown by $h$ .

Total fees with a hard hurdle Use it

R_{GP} = P_1\,m + \max\left\{0,\; \left[P_1(1 - m) - P_0(1 + h)\right] p\right\}

Worked example Incentive fee net of the management fee, with a 5% hard hurdle

Value needed to clear the hurdle = 200 × 1.05 = 210.
Incentive fee = 20% × (232.46 − 210) = 20% × 22.46 = 4.492.
Total fees = 3.54 + 4.492 = 8.032. Investor return = (36 − 8.032) ÷ 200 = 13.98%.

The hurdle cut the incentive fee by 200 × 5% × 20% = 2.0.

Steps 1 to 3 on your calculator

236×0.015=STO1 management fee 3.54
200×1.05=STO3 210, the value needed to clear the hurdle
236×0.985−RCL3=×0.2=STO2 incentive fee 4.492
236−200−RCL1−RCL2=÷200= 0.1398

STO store · RCL recall a stored number

236ENTER0.015×STO1 management fee 3.54
200ENTER1.05×STO3 210, the value needed to clear the hurdle
236ENTER0.985×RCL3−0.2×STO2 incentive fee 4.492
236ENTER200−RCL1−RCL2−200÷ 0.1398

ENTER enter (on the HP, puts the number on the stack) · STO store · RCL recall a stored number

Rearrange itIncentive fee net of the management fee: solve for any input

The question asks for

A fund starts the year at USD 200 million and ends it at USD 236 million before fees. It charges 1.50% of year-end value, plus 20.00% of the gain net of the management fee. The total fees, in USD millions, are closest to:

Starting value, P₀ (USD m)Ending value before fees, P₁ (USD m)Management fee on ending value, m%Incentive fee, p%Hard hurdle, h (0 for none)%

R_{GP} = P_{1} m + max {0, [P_{1} (1 - m) - P_{0} (1 + h)] p}

236 × 0.015 + 0.2 × max(0, 236 × 0.985 − 200) = 10.032

Total fees, R_GP (USD m)10.032

On your calculator

236×0.015=STO1management fee
236×0.985−200=×0.2=STO2incentive fee
RCL1+RCL2=10.032

STO store · RCL recall a stored number

236ENTER0.015×STO1management fee
236ENTER0.985×200−0.2×STO2incentive fee
RCL1RCL2+10.032

ENTER enter (on the HP, puts the number on the stack) · STO store · RCL recall a stored number

Structure	Management fee	Incentive fee	Total fees	Investor return
Independent	3.54	7.200	10.740	12.63%
Net of management fee	3.54	6.492	10.032	12.98%
Net, 5% hard hurdle	3.54	4.492	8.032	13.98%

Loading the interactive…

The same fund and the same gross 18% gave investors between 12.63% and 13.98%. Read the fee terms first: they change the answer by more than a percentage point.

Exam tip Which AUM? If the question says the management fee is on beginning AUM, use $P_0 \times m$ . If it says end of year, use $P_1 \times m$ and remember it reduces the base for the incentive fee in the net version.

How does a high-water mark work across several years?

A high-water mark is the highest value, net of fees, that the investor’s capital has reached at the end of any earlier period. After a loss, the manager earns no incentive fee until the value recovers past that mark. It matters only across years, so it is solved year by year, with the investor’s capital after fees as the next year’s start.

Use it

Total fees with a high-water mark Use it

R_{GP} = P_t\,m + \max\left\{0,\; \left[P_t(1 - m) - H\right] p\right\}

Take the same fund, in the net-of-management-fee structure with no hurdle, 1.5% management fee on year-end value and a 20% incentive fee.

Worked example Year 3: the fee applies only above the mark

The fund recovers to 240 before fees. The investor starts the year with 206.85.

Management fee = 240 × 1.5% = 3.60.
Incentive fee = 20% × (240 × 0.985 − 225.968) = 20% × (236.40 − 225.968) = 20% × 10.432 = 2.086. Only the part above the old mark counts, not the whole rise from 206.85.
Total fees = 5.686. Investor return = (240 − 5.686 − 206.85) ÷ 206.85 = 13.28%.

Investor capital at the end is 234.314, a new high-water mark.

Steps 1 to 3 on your calculator

240×0.015=STO1 management fee 3.6
240×0.985−225.968=×0.2=STO2 incentive fee 2.0864
240−RCL1−RCL2−206.85=÷206.85= 0.1328

STO store · RCL recall a stored number

240ENTER0.015×STO1 management fee 3.6
240ENTER0.985×225.968−0.2×STO2 incentive fee 2.0864
240RCL1−RCL2−206.85−206.85÷ 0.1328

ENTER enter (on the HP, puts the number on the stack) · STO store · RCL recall a stored number

Rearrange itA year with a high-water mark: solve for the fees or the return

The question asks for

A fund's value at year end is USD 240 million before fees. It charges 1.50% of year-end value plus 20.00% of the gain, net of the management fee, above a high-water mark of USD 225.968 million. The total fees, in USD millions, are closest to:

Value at year end before fees, P (USD m)High-water mark, H (USD m)Management fee on year-end value, m%Incentive fee, p%

R_{GP} = P m + max [0, (P (1 - m) - H) p]

240 × 0.015 + 0.2 × max(0, 240 × 0.985 − 225.968) = 5.6864

Total fees, R_GP (USD m)5.6864

On your calculator

240×0.015=STO1management fee
240×0.985−225.968=×0.2=STO2incentive fee on the part above the mark
RCL1+RCL2=5.6864

STO store · RCL recall a stored number

240ENTER0.015×STO1management fee
240ENTER0.985×225.968−0.2×STO2incentive fee on the part above the mark
RCL1RCL2+5.6864

ENTER enter (on the HP, puts the number on the stack) · STO store · RCL recall a stored number

The high-water mark is personal to each investor’s entry. Suppose a new investor puts in 206.85 at the end of year 2, the same amount the original investor holds at that point. Their mark starts at their entry value.

Worked example A new investor in year 3

Management fee = 3.60, as before.
Incentive fee = 20% × (240 × 0.985 − 206.85) = 20% × 29.55 = 5.91.
Total fees = 9.51. Investor return = (240 − 9.51 − 206.85) ÷ 206.85 = 11.43%.

Same fund, same year, same terms: 13.28% for the original investor and 11.43% for the newcomer.

Steps 1 to 3 on your calculator

240×0.015=STO1 management fee 3.6
240×0.985−206.85=×0.2=STO2 incentive fee 5.91
240−RCL1−RCL2−206.85=÷206.85= 0.1143

STO store · RCL recall a stored number

240ENTER0.015×STO1 management fee 3.6
240ENTER0.985×206.85−0.2×STO2 incentive fee 5.91
240RCL1−RCL2−206.85−206.85÷ 0.1143

ENTER enter (on the HP, puts the number on the stack) · STO store · RCL recall a stored number

A hard hurdle works the same way for everyone, because it is tied to each investor’s starting capital. A high-water mark depends on when the investor entered, so it makes returns differ between investors. That is also why a later entrant after a fall can owe fees on the recovery that an earlier investor does not owe.

Go deeper Why net-of-management-fee is better for the investor

When the incentive fee is charged on the gain after the management fee, the manager is paid only on profit the investor actually keeps. The saving is the incentive rate times the management fee: 20% × 3.54 = 0.708 in the example (7.200 − 6.492). Check the wording: some textbook examples apply the high-water mark to the value before the management fee. Always follow the base the question states.

Go deeper Soft hurdles and catch-up

The hurdle above is a hard hurdle: only the excess is charged. A soft hurdle with a catch-up clause lets the manager earn the incentive fee on the whole return once the hurdle is cleared. That is covered in the fees lesson of the features and structures module.

What other fee arrangements appear?

Fund terms are often customized. The same fund can charge different investors different fees, so the net return an investor earns can differ from a fund’s quoted performance.

Customized fee arrangements

Fees can differ between investors in one fundquoted index returns are net of aggregate fees, so what a given investor earns can vary

Discounts for liquidity terms and size Use it longer lockups and larger commitments earn lower fees
Founders class shares Know the idea lower fees for early investors in a new fund
Either/or fee Use it the greater of a low fixed fee or a higher incentive fee above a hurdle
Clawback Use it earlier incentive fees returned if later losses show overpayment

Limited partnerships may charge lower fees to investors who accept longer lockups, and managers often discount for larger investors or for placement agents who brought them in. The founders class shares of a new fund entice early investors into a start-up fund with a lower fee structure (for example 1% and 10% instead of 2% and 20%), often only for the first slice of assets. Smaller funds with strong performance and limited capacity can keep higher fees.

An either/or fee gives the manager the greater of a low management fee and a higher incentive fee above a hurdle. The low fee covers costs in poor years, and the higher incentive pays the manager in strong years.

A clawback returns incentive fees that were paid early. It protects investors when a manager takes carry on a winning deal and a later deal loses.

Go deeper Hurdles and catch-up in a multi-year private fund

Private capital funds usually pay carry through a waterfall with a hurdle and a catch-up clause, which the fees lesson of the features and structures module covers. This lesson’s recipe is the version used for hedge fund style calculations.

Memorize this

MemorizeThe recipe

Step	What to do
1. Management fee	$m\times$ AUM, at the start or end date the question states
2. Incentive fee	$p\times$ the fee base, never below zero
3. Investor return	(gain − total fees) ÷ starting capital

Memory hook Fee, fee, divide by the start: the investor keeps the gain minus both fees, measured against what they put in.

Know it cold Total fees $=P_1m+\max[0,\,p\times\text{base}]$ ; $r_i=(P_1-P_0-\text{fees})\div P_0$ .

MemorizeIncentive fee base

Wording in the question	Base for p
calculated independently	$P_1-P_0$
net of the management fee	$P_1(1-m)-P_0$
with a hard hurdle $h$	$P_1(1-m)-P_0(1+h)$
with a high-water mark $H$	$P_1(1-m)-H$

Memory hook Each added protection subtracts something more: first the management fee, then the hurdle, then the old peak. The base only gets smaller.

Know it cold Independent gives the highest fees. A high-water mark means no incentive fee until net value passes the previous net peak.

MemorizeFee variations

Term	Idea
Founders class shares	lower fees for early investors
Either/or fee	greater of a low management fee or a higher incentive fee above a hurdle
Clawback	incentive fees paid earlier are returned after later losses
Size / lockup discounts	larger investors and longer lockups pay less

Memory hook Early, big and patient investors get discounts; the either/or fee pays the manager the larger of two formulas.

Know it cold Same fund, different fee terms, different net returns.

What the incentive fee is charged on

Incentive fee = p × fee basethe question tells you which base; the management fee is charged either way

Gross gain Memorize P₁ − P₀; management and incentive fees calculated independently
Gain net of the management fee Memorize P₁(1 − m) − P₀; a lower fee for the investor
Gain above a hard hurdle Memorize P₁(1 − m) − P₀(1 + h); only the excess is charged
Value above a high-water mark Memorize P₁(1 − m) − H; nothing is charged below the mark

Customized fee arrangements

Fees can differ between investors in one fundquoted index returns are net of aggregate fees, so what a given investor earns can vary

Discounts for liquidity terms and size Use it longer lockups and larger commitments earn lower fees
Founders class shares Know the idea lower fees for early investors in a new fund
Either/or fee Use it the greater of a low fixed fee or a higher incentive fee above a hurdle
Clawback Use it earlier incentive fees returned if later losses show overpayment

Management fee

F = m \times \text{AUM}

Quick example

A fund with USD 400 million of assets charges 1.5% on the AUM stated in its terms. Fee = 400 × 0.015 = USD 6.0 million. Use start or end of period AUM as the terms say.

On your calculator

400×0.015= 6

400ENTER0.015× 6

ENTER enter (on the HP, puts the number on the stack)

Total fees, calculated independently

R_{GP} = P_1\,m + \max\left[0,\; (P_1 - P_0)\,p\right]

Quick example

Start 100, end 112 before fees, management fee 2% of year-end value, incentive fee 20% of the gain. 112 × 0.02 + 0.20 × 12 = 2.24 + 2.40 = 4.64.

On your calculator

112×0.02=STO1 2.24
112−100=×0.2=STO2 2.4
RCL1+RCL2= 4.64

STO store · RCL recall a stored number

112ENTER0.02×STO1 2.24
112ENTER100−0.2×STO2 2.4
RCL1RCL2+ 4.64

ENTER enter (on the HP, puts the number on the stack) · STO store · RCL recall a stored number

Investor net return

r_i = \dfrac{P_1 - P_0 - R_{GP}}{P_0}

Quick example

Gain 12 on a start of 100, total fees 4.64. (12 − 4.64) ÷ 100 = 7.36%. Divide by the starting capital, not the ending value.

On your calculator

112−100−4.64=÷100= 0.0736

112ENTER100−4.64−100÷ 0.0736

ENTER enter (on the HP, puts the number on the stack)

Total fees, incentive fee net of the management fee

R_{GP} = P_1\,m + \max\left\{0,\; \left[P_1(1 - m) - P_0\right] p\right\}

Quick example

Start 500, end 560, management fee 1% of year-end value, incentive fee 20% net of it. Incentive = 0.20 × (560 × 0.99 − 500) = 0.20 × 54.4 = 10.88. Fees = 5.60 + 10.88 = 16.48, so the investor earns (60 − 16.48) ÷ 500 = 8.70%.

On your calculator

560×0.01=STO1 5.6
560×0.99−500=×0.2=STO2 10.88
560−500−RCL1−RCL2=÷500= 0.087

STO store · RCL recall a stored number

560ENTER0.01×STO1 5.6
560ENTER0.99×500−0.2×STO2 10.88
560ENTER500−RCL1−RCL2−500÷ 0.087

ENTER enter (on the HP, puts the number on the stack) · STO store · RCL recall a stored number

Total fees with a hard hurdle

R_{GP} = P_1\,m + \max\left\{0,\; \left[P_1(1 - m) - P_0(1 + h)\right] p\right\}

Quick example

Start 120, end 146, management fee 1.5% of year-end value, incentive fee 20% net of it, hurdle 4%. Incentive = 0.20 × (146 × 0.985 − 120 × 1.04) = 0.20 × 19.01 = 3.802. Fees = 2.19 + 3.802 = 5.992, so the investor earns (26 − 5.992) ÷ 120 = 16.67%.

On your calculator

146×0.015=STO1 2.19
120×1.04=STO3 124.8, the value needed to clear the hurdle
146×0.985−RCL3=×0.2=STO2 3.802
146−120−RCL1−RCL2=÷120= 0.1667

STO store · RCL recall a stored number

146ENTER0.015×STO1 2.19
120ENTER1.04×STO3 124.8, the value needed to clear the hurdle
146ENTER0.985×RCL3−0.2×STO2 3.802
146ENTER120−RCL1−RCL2−120÷ 0.1667

ENTER enter (on the HP, puts the number on the stack) · STO store · RCL recall a stored number

Total fees with a high-water mark

R_{GP} = P_t\,m + \max\left\{0,\; \left[P_t(1 - m) - H\right] p\right\}

Quick example

High-water mark 300, value before fees 310, management fee 1% of year-end value, incentive fee 20% net of it. Incentive = 0.20 × (310 × 0.99 − 300) = 0.20 × 6.9 = 1.38. Below 300 the incentive fee would be zero.

On your calculator

310×0.99−300=×0.2= 1.38

310ENTER0.99×300−0.2× 1.38

ENTER enter (on the HP, puts the number on the stack)

How it is asked

Independent versus net of management fee

Start 100, end 132 before fees, 1.5% on year-end AUM, 20% incentive net of the management fee. Net return?

1.98 + 20% × (132 − 1.98 − 100) = 1.98 + 6.004 = 7.984; (32 − 7.984) ÷ 100 = 24.0%. Traps: 23.6% (independent) and 25.6% (forgets the management fee).
High-water mark below the peak

Last year ended at a net value of 320. This year ends at 311 before fees. Incentive fee?

Zero. The fund is below its high-water mark. Trap: 20% of the gain from the low point.
Hard hurdle

Hurdle 4% and incentive net of the management fee. What is the base?

$P_1(1-m)-P_0(1+h)$ : only the excess over the hurdle is charged.
Entering after a fall

One investor entered at the peak and one after a large fall. The fund rises back to its peak.

The investor who entered after the fall pays an incentive fee; the other pays none.

Exam traps

Charging the management fee on beginning AUM when the question says end of year, or the reverse.
Charging the incentive fee on the gross gain when the question says net of the management fee.
Charging an incentive fee while the value is below the high-water mark.
Dividing the net gain by the ending value instead of the starting capital.
Forgetting that a new investor has no past high-water mark, so a later entrant can pay more than an earlier one.

Checkpoint

6 exam-style questions. About 90 seconds each.

1A fund starts at EUR 100 million and ends the year at EUR 125 million before fees. Fees are 2% of year-end AUM plus a 20% incentive fee, calculated net of the management fee. The investor's net return is closest to:
2A fund with a high-water mark ended last year at a net value of GBP 150 million. This year it ends at GBP 145 million before fees. The incentive fee for the year is:
3Two investors hold the same hedge fund under the same fee terms. One invested at the fund's peak and one after a large fall. If the fund then rises back to its peak, the investor who entered after the fall will most likely:
4A fund starts the year at USD 150 million and ends at USD 186 million before fees. It charges 1% of year-end AUM and a 15% incentive fee, net of the management fee and above a 4% hard hurdle. The investor's net return is closest to:
5A hedge fund's net value after fees at the end of last year was USD 118 million, its high-water mark. This year the fund ends at USD 126 million before fees. It charges 2% of year-end AUM and a 20% incentive fee, net of the management fee. The incentive fee is closest to:
6A fund with USD 250 million at the start of the year earns a gross gain of USD 20 million. Its either/or fee lets the manager take the greater of a 0.8% management fee on starting AUM or a 25% incentive fee on the gain above a 3% hurdle. The manager's fee is closest to:

Key takeaways

Management fee on the stated AUM; incentive fee on the stated base.
Net of management fee, a hurdle and a high-water mark each lower the incentive fee.
Investor return = (gain − total fees) ÷ starting capital.
Different entry dates and fee terms mean different net returns in the same fund.

Management fee

F = m \times \text{AUM}

Quick example

A fund with USD 400 million of assets charges 1.5% on the AUM stated in its terms. Fee = 400 × 0.015 = USD 6.0 million. Use start or end of period AUM as the terms say.

On your calculator

400×0.015= 6

400ENTER0.015× 6

ENTER enter (on the HP, puts the number on the stack)

Total fees, calculated independently

R_{GP} = P_1\,m + \max\left[0,\; (P_1 - P_0)\,p\right]

Quick example

Start 100, end 112 before fees, management fee 2% of year-end value, incentive fee 20% of the gain. 112 × 0.02 + 0.20 × 12 = 2.24 + 2.40 = 4.64.

On your calculator

112×0.02=STO1 2.24
112−100=×0.2=STO2 2.4
RCL1+RCL2= 4.64

STO store · RCL recall a stored number

112ENTER0.02×STO1 2.24
112ENTER100−0.2×STO2 2.4
RCL1RCL2+ 4.64

ENTER enter (on the HP, puts the number on the stack) · STO store · RCL recall a stored number

Investor net return

r_i = \dfrac{P_1 - P_0 - R_{GP}}{P_0}

Quick example

Gain 12 on a start of 100, total fees 4.64. (12 − 4.64) ÷ 100 = 7.36%. Divide by the starting capital, not the ending value.

On your calculator

112−100−4.64=÷100= 0.0736

112ENTER100−4.64−100÷ 0.0736

ENTER enter (on the HP, puts the number on the stack)

Total fees, incentive fee net of the management fee

R_{GP} = P_1\,m + \max\left\{0,\; \left[P_1(1 - m) - P_0\right] p\right\}

Quick example

On your calculator

560×0.01=STO1 5.6
560×0.99−500=×0.2=STO2 10.88
560−500−RCL1−RCL2=÷500= 0.087

STO store · RCL recall a stored number

560ENTER0.01×STO1 5.6
560ENTER0.99×500−0.2×STO2 10.88
560ENTER500−RCL1−RCL2−500÷ 0.087

ENTER enter (on the HP, puts the number on the stack) · STO store · RCL recall a stored number

Total fees with a hard hurdle

R_{GP} = P_1\,m + \max\left\{0,\; \left[P_1(1 - m) - P_0(1 + h)\right] p\right\}

Quick example

On your calculator

146×0.015=STO1 2.19
120×1.04=STO3 124.8, the value needed to clear the hurdle
146×0.985−RCL3=×0.2=STO2 3.802
146−120−RCL1−RCL2=÷120= 0.1667

STO store · RCL recall a stored number

146ENTER0.015×STO1 2.19
120ENTER1.04×STO3 124.8, the value needed to clear the hurdle
146ENTER0.985×RCL3−0.2×STO2 3.802
146ENTER120−RCL1−RCL2−120÷ 0.1667

ENTER enter (on the HP, puts the number on the stack) · STO store · RCL recall a stored number

Total fees with a high-water mark

R_{GP} = P_t\,m + \max\left\{0,\; \left[P_t(1 - m) - H\right] p\right\}

Quick example

On your calculator

310×0.99−300=×0.2= 1.38

310ENTER0.99×300−0.2× 1.38

ENTER enter (on the HP, puts the number on the stack)

All Alternative Investments formulas, every lesson

Practice exam-style questions on Alternative Investment Performance and Returns

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Where this comes back

Hedge Funds Alternative Investments
Private Capital: Private Equity and Private Debt Alternative Investments

Questions candidates ask

How do you calculate a hedge fund's net return after fees?

Compute the management fee on the AUM the terms state, then the incentive fee on the stated base (gross gain, gain net of the management fee, above a hurdle or above a high-water mark). Subtract both from the gain and divide by the starting capital.

How does a high-water mark affect hedge fund fees?

The manager earns no incentive fee until the fund's net value rises above its previous highest net value. After a loss the fee applies only to the part of the recovery above that mark, so investors do not pay twice for the same gain.

What does "incentive fee net of management fee" mean?

The incentive fee is charged on the gain after deducting the management fee, not on the gross gain. It lowers the incentive fee by the incentive rate times the management fee, so the investor keeps slightly more.

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