Which of the following types of entities may charge performance-based fees?

Hedge funds are uniquely positioned to charge performance-based fees, commonly referred to as incentive fees. This fee structure typically includes a management fee based on assets under management as well as a performance fee that is calculated as a percentage of the profits generated by the fund above a specified benchmark. The rationale behind this is that hedge funds often employ sophisticated investment strategies and leverage, enabling them to potentially generate higher returns than traditional investment vehicles.

The ability to charge performance-based fees aligns the interests of the fund managers with those of the investors. When fund performance exceeds a predetermined threshold, the manager's compensation increases, incentivizing them to maximize returns for their investors. This model contrasts with other investment entities, like mutual funds or REITs, which generally charge flat management fees and might not have the flexibility to include performance-based components due to regulatory constraints or different investor expectations. Similarly, direct participation programs (DPPs) also do not typically utilize performance-based fee structures.