Hedge fund fees are commonly quoted with “x and xx” structure, like “2 and 20.” This would refer to a 2% management fee and a 20% incentive fee. The management fee is charged on total assets, while the incentive fee is charged on capital gains. The fees can be independently calculated, or based on return net management fee.
Sometimes there is also a hurdle rate, which denotes a target return that must be achieved before the incentive fee is earned. When there is a hurdle rate, the incentive fee is calculated net of the hurdle rate gain.
Finally, a fund may have a high water mark, which requires a fund to return to its high water mark before incentive fees can be paid. If a fund has a series of loses then a sudden gain, if the fund does not return to a high water mark, no incentive fee will be paid even if the last gains create a return higher than the hurdle rate. The high water mark is usually a previous high in fund value. When a high water mark is used, the incentive fee is calculated on gains net of the previous high water mark.