[4] Finally, performance fees charged to pension plans governed by the Employee Retirement Income Security Act (ERISA) must also meet certain requirements.
Of the $100,000 increase, 20% (i.e. $20,000) will be paid to the investment manager, thereby reducing the NAV of the fund by that amount and leaving the investor with shares worth $1,080,000, giving a return of 8% before deduction of any other fees.
Therefore, to address this concern, hedge funds will typically only charge a performance fee on increases in NAV over the high-water mark.
As hurdles reduce the size of performance fees and reward successful active management, they are popular with investors.
Hedge funds may also pay fees to administrators, prime brokers, lawyers, accountants and other service providers.