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The ideal fee structure aligns the incentives of the investor with those of the fund manager. Mutual funds typically only charge a management fee which is a proportion of the funds under management. Hedge funds on the other hand generally change an incentive fee which is a fraction of the fund's return each year in excess of the high-water mark. The justification generally given for these incentive fees is that they provide the manager with the incentive to target absolute returns.
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