I came across this question and I can’t wrap my head around it.
A hedge fund begins the year with $120m and earns a 25% return for the year. The fund charges 1.5% management fee on end of year value and a 15% incentive fee on the return, net of management fees that is in excess of 6% fixed hurdle rate. The fund’s investors’ return for the year is closest to
A) 21.25%
B) 20.56%
C)19.66%
Can someone please walk me through this problem?
I will give it a shot…
Beginning value = 120,000,000
After return =150,000,000 (120,000,000*1.25)
1.5% Management fee on the end of year value (150,000,000) is 2,225,000 (150,000,000*.015).
Hard hurdle means your incentive fee is based on a return above that. So, 120,000,000*1.06 = 127,200,000. So your incentive fee is based on the difference after you deduct your management fee for the after return value. 150,000,000 - 2,225,000 - 127,200,000 = 20,575,000. 20,575,000 is what your incentive fee is based on. So, 20,575,000*.15=3,086,250. So, your incentive fee is 3,086,250. Total fees now equal your incentive fee (3,086,250) + your management fee (2,225,000) = 5,311,250. Minus that from after return value (150,000,000-5,311,250=144,688,750. (144,688,750/120,000,000) -1 = 20.57
Correct?
Thanks!! Makes so much sense now! 
Friendly reminder: Learn the difference between soft and hard hurdle rate since i know that was asked at one of the mock exam (confused me).
Soft hurdle rate If the asset manager “beat” the hurdle rate they will charge you a defined percentage fee for the whole return between your initial value (Po) and ending value (P1).
Example:
Hard hurdle rate If the asset manager “beat” the hurdle rate they will charge you a defined percentage fee for the value above the hurdle rate margin.
Example: