The correct answer is C.

Incentive fees in hedge funds are indeed performance-based fees that reward fund managers for generating returns above a specified benchmark or hurdle rate. This fee structure is designed to align the interests of the fund managers with those of the investors. By tying a portion of the fund managers' compensation to the fund's performance, it incentivizes them to strive for superior returns. If the fund's returns exceed the specified benchmark or hurdle rate, the fund managers receive a percentage of those excess returns as incentive fees. This not only rewards the fund managers for their skill and effort but also ensures that they share in the upside when the investors do well. However, if the fund's returns do not exceed the benchmark or hurdle rate, the fund managers do not receive any incentive fees. This ensures that the fund managers are only rewarded when they generate value for the investors.

Choice A is incorrect. While it is true that incentive fees are used to align the interests of fund managers and investors, they are not a fixed percentage of the fund's net asset value. Instead, they are typically based on a percentage of the returns generated by the fund that exceed a specified benchmark or hurdle rate.

Choice B is incorrect. Incentive fees do not serve to penalize fund managers for poor performance. Rather, they serve as a reward mechanism for generating superior returns above a certain benchmark or hurdle rate.

Choice D is incorrect. Incentive fees are not always equal to management fees and their charge depends on the performance of the fund rather than being charged regardless of it. They are specifically designed to provide additional compensation if the manager outperforms certain benchmarks.