What does a clawback provision in a hedge fund allow investors to do?

A clawback provision in a hedge fund is designed to protect investors by allowing them to reclaim previously paid incentive fees that were awarded to fund managers under certain circumstances, typically when the fund later experiences losses or underperformance. This provision ensures that managers do not retain excessive fees based on prior performance that was not sustained.

When a hedge fund performs well initially, it may pay out incentive fees to the managers based on those gains. However, if the fund later incurs losses, the clawback provision allows the investors to recover some or all of those incentive fees to ensure that managers are only rewarded for actual performance, thereby aligning the interests of the fund managers with those of the investors. This mechanism emphasizes fairness and accountability in the investment management process.

The other options do not accurately describe the purpose or function of a clawback provision within a hedge fund structure. For example, increasing incentive fees, changing investment terms, or guaranteeing returns are unrelated to the concept of clawbacks, which specifically deals with the recapture of fees under certain performance scenarios.