Calculation Explanation

Step 1: Calculate the gross return

• Initial investment: $10,000,000
• Year-end value: $11,800,000
• Gross return = ($11,800,000 - $10,000,000) / $10,000,000 = 18%

Step 2: Calculate management fee

• Management fee = 2% of year-end value
• Management fee = 2% × $11,800,000 = $236,000

Step 3: Calculate value after management fee

• Value after management fee = $11,800,000 - $236,000 = $11,564,000

Step 4: Calculate incentive fee

• Hard hurdle rate = 6%
• First, calculate the hurdle amount: $10,000,000 × (1 + 6%) = $10,600,000
• Incentive fee is only charged on the amount above the hurdle, net of management fee
• Amount above hurdle = $11,564,000 - $10,600,000 = $964,000
• Incentive fee = 20% × $964,000 = $192,800

Step 5: Calculate final value after all fees

• Final value = $11,564,000 - $192,800 = $11,371,200

Step 6: Calculate net-of-fees return

• Net return = ($11,371,200 - $10,000,000) / $10,000,000 = 13.712%
• Rounded to two decimal places: 13.71%

Step 7: Verify with the options The calculated net return is 13.71%, which corresponds to option B.

Key Points:

1. Management fee is based on year-end value (2% of $11.8 million)
2. Incentive fee is calculated net of management fee
3. Hard hurdle rate means incentive fee is only charged on returns above 6%
4. The calculation follows the sequence: gross return → management fee → incentive fee → net return

Therefore, the correct answer is B: 13.71%