Hedge fund collects 20% of profit, or $2
Hedge fund collects 2% fee, which in this case is $2
It invests that money in lots of things. Some do well, some don't.
Once an investor chooses to invest in a hedge fund, they then allocate capital to a hedge fund manager. In this example, they invest $100 dollars. The hedge fund manager immediately collects a 2% fee, leaving $98 dollars to be invested in various assets, such as stocks, bonds, and commodities. Here, the investment in assets provides a profitable return of $110 dollars. The hedge fund then takes a 20% incentive fee off the profit of $12, at $2.4. This leaves $107.6 dollars, rounded up to $108 here, to be returned to the investor.