Could anyone help me to understand why we are not deducting 5% of $60 million in the 2nd year to get to the incentive fees in the below question?
The hedge fund had an initial investment of $60 million and at the end of first year, value was $70 million after fees. At the end of second year, value was $80 million before fees. The fund has 2 and 20 fee structure and incentive fees are calculated using a high watermark and a soft hurdle rate of 5%. Calculate the total fee paid for year 2.
a) 2.5 million
b) 3.6 million
c) 4.8 million
Correct answer is: b