A is correct. The investor’s return met the 4% hurdle rate, so the incentive fee charged would be ($1,849,500 – $1,500,000 – $60,000) × 15% = $43,425. 

B is incorrect because the fee was calculated using an increased asset base as follows: 23.3% × $1.5  million = $349,500 and then taking a 15% incentive fee on this return: $349,500 × 15% = $52,425. 

C is incorrect because the fee was calculated using an increased investor asset base as follows: 23.3% × $1.5 million = $349,500 and then taking a 15% incentive fee on this return less a 4% hurdle rate: $349,500 × 15% – 4% = $38,445.

A is correct. The $120 million grows by 25% to $150 million [= $120 million × (1 + 0.25)]. The management fee is $2.25 million (= $150 million × 0.015), leaving $147.75 million, net of the management fee, or an increase of $27.75 million over the beginning value of $120 million. The 6% hurdle rate requires an increase of $7.2 million (= $120 million × 0.06), so the fund has earned $20.55 million (= $27.75 million – $7.2 million) over the hurdle rate, net of the management fee. The incentive fee is 15% of this, or $3.0825 million (= $20.55 million × 0.015), leaving an increase in fund assets, net of management and incentive fees, of $24.6675 million (= $27.75 million – $3.0825 million). The investors’ return, net of fees, is $24.6675/$120 million = 20.56%. 

C is incorrect because it fails to adjust for the hurdle rate when calculating the incentive fee or 0.15 × $27.75 million = $4.1625 million and $27.75 million – $4.1625 million = $23.5875 million. $23.5875 million/$120 million = 19.66%. 

B is incorrect because it ignores that management fee. The fund grows to $150 million. Incentive fee is ($150 million – $120 million) × 0.15 = $4.5 million $150 million – $120 million – $4.5 million = $25.5 million $25.5 million/$120 million = 0.2125