# Hedge Fund Fee Structure, High Water Mark and Hurdle Rate

In a hedge fund, the investors pay two types of fee to the hedge fund managers, namely management fee and incentive fee (also called performance fees). They typically charge a management fee of 1-2% of fund’s net asset value. This is paid irrespective of how the fund performs. The hedge fund managers also charge an incentive fee of 20% of profits. The fee charged is mentioned as “2 and 20” which means 2% management fee and 20% of funds profits. The fee structure for hedge funds is significantly high compared to mutual funds. The calculation of profits for the purpose of calculating incentive fees can follow different structures:

• The profit can simply be the total increase in NAV
• The profit can be the increase in NAV after adjusting for management fees
• There could also be a benchmark or a hurdle rate. The incentive will be paid only if the fund's annual rate of return exceeds the hurdle rate.
• They may also have a feature called high water mark.