An analyst at an investment firm is researching the fee structures at several hedge funds. The analyst notes that, in the past, incentive fees strongly favored hedge fund managers to the disadvantage of investors in the hedge funds, causing investors to be reluctant to invest in them. Many hedge funds have recently adjusted the terms they offer to attract new investors. Which of the following correctly describes one of these adjustments to the fee structure?

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A high-water mark clause states that incentive fees will only be paid when returns are above a certain percentage return each year.

A hurdle rate states that incentive fees will only be paid when cumulative investor profits are positive and are above a specified amount.

A clawback clause provides a mechanism for investors to reclaim incentive fees that have already been paid.

A proportional adjustment clause provides a mechanism to raise the hurdle rate as the hedge fund generates more profits.

Financial Risk Manager Part 1