Answer: Management fees based on committed capital.

## 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.

Author: LeetQuiz .