Answer: $2.96 million.

## Calculation Steps: 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 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 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 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 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) would be incorrect because it doesn't account for the proper calculation of incentive fees on returns net of management fees. - Option C ($3.20 million) would be incorrect because it might calculate incentive fees on the gross return before management fees (20% of $10 million = $2 million, plus $1.20 million management fee = $3.20 million). - Option B ($2.96 million) is correct as calculated above. **Key Concept:** In hedge fund fee structures, incentive fees are typically calculated on returns net of management fees, not on gross returns. This creates a "fee-on-fee" structure where management fees reduce the base on which incentive fees are calculated.

Author: LeetQuiz .