Answer: $2.96 million.

## Calculation Explanation Let's calculate step by step: **Step 1: Calculate end-of-year AUM before fees** - Beginning AUM = $50 million - Annual return before fees = 20% - End-of-year AUM before fees = $50 million × (1 + 0.20) = $50 million × 1.20 = **$60 million** **Step 2: Calculate management fee** - Management fee = 2% of end-of-year AUM before fees - Management fee = 2% × $60 million = 0.02 × $60 million = **$1.20 million** **Step 3: Calculate return net of management fees** - Return before fees = $60 million - $50 million = $10 million - Return net of management fees = $10 million - $1.20 million = **$8.80 million** **Step 4: Calculate incentive fee** - Incentive fee = 20% of return net of management fees - Incentive fee = 20% × $8.80 million = 0.20 × $8.80 million = **$1.76 million** **Step 5: Calculate total fees** - Total fees = Management fee + Incentive fee - Total fees = $1.20 million + $1.76 million = **$2.96 million** **Verification:** - Option A ($2.80 million) is incorrect - this might come from miscalculating incentive fee on gross return - Option B ($2.96 million) is correct - Option C ($3.20 million) is incorrect - this might come from calculating incentive fee on return before management fees ($10 million × 20% = $2 million, plus $1.20 million management fee = $3.20 million) **Key Concept:** In hedge fund fee structures, incentive fees are typically calculated on returns **net of management fees**, which is an important distinction from calculating them on gross returns.

Author: LeetQuiz .