Question

"The manager of an unregistered hedge fund charges a fee of "2 and 20." This means that investors are charged a(n):"

Answer 1

annual management fee against net assets of 2% plus a performance fee based on 20% of profits

Step-by-step explanation:

Given that generally, the hedge fund fee is "2 and 20" this implies that a 2% annual management fee as a percent of assets under management, plus 20% of profits.

It should be noted that Hedge fund managers are exempted from the security regulations and Investment Company Act of 1940 that limits the manager's compensation to a percentage of assets under management, that is, performance fee is prohibited.

Hence, the correct answer is investors are charged "annual management fee against net assets of 2% plus a performance fee based on 20% of profits"