Detailed Explanation

Correct Answer: C - Management fees based on committed capital

Why Option C is Correct:

1. Private Equity Funds: Typically charge management fees based on committed capital (the total amount investors have pledged to invest) rather than on the current value of assets under management (AUM). This is because private equity funds invest in illiquid assets over a long period, and the committed capital represents the total pool available for investment.

2. Hedge Funds: Usually charge management fees based on assets under management (AUM) or net asset value, which fluctuates with market performance. Hedge funds invest in liquid securities and can easily value their portfolios.

Why Other Options are Incorrect:

A. Hurdle rates:

• NOT exclusive to private equity funds
• Both private equity funds AND hedge funds commonly use hurdle rates
• Hurdle rates are minimum return thresholds that must be achieved before performance fees are paid

B. Performance fees:

• NOT exclusive to private equity funds
• Both private equity funds AND hedge funds charge performance fees (often called "carried interest" in private equity and "incentive fees" in hedge funds)
• Performance fees are typically a percentage of profits above a certain threshold

Key Distinctions:

1. Fee Structure Difference:

   • Private Equity: Fees based on committed capital (even if not fully deployed)
   • Hedge Funds: Fees based on AUM (current market value)

2. Rationale:

   • Private equity funds need predictable fee income to cover operational costs during the investment period when capital is being deployed
   • Hedge funds deal with liquid assets where AUM is easily determined

3. Industry Standard:

   • Private equity: Typically 1.5-2.5% of committed capital
   • Hedge funds: Typically 1-2% of AUM

This distinction reflects the fundamental differences in liquidity, investment horizon, and asset types between private equity and hedge fund strategies.