On $100 million of assets earning 10%, the management fee takes $2 million and the incentive fee takes 20% of the remaining $8 million, or $1.6 million. The investor keeps $6.4 million, an effective net return of 6.4% against a 10% gross.
The maths gets harsher when returns are modest. At a 5% gross return the same structure leaves 2.4% net, meaning more than half the return went to fees. This is why hurdles and benchmark-relative incentive fees became more common as returns compressed.
Industry averages have fallen toward roughly 1.4% and 17%, with founder classes, longer lock-ups and larger commitments buying further discounts. See performance-fee, hurdle-rate and high-water-mark.
Related: performance-fee, high-water-mark, hurdle-rate, hedge-fund, management-fee, carried-interest