Alternative Investments - Alternative Investments Section 2
- Option : A
- Explanation : Management fee = $555,500,000 * 0.02 = $11,110,000 Incentive fee = ($555,500,000 – $500,000,000) * 0.15 = $8,325,000 Total fees = $19,435,000 Return = ($555,500,00 - $500,000,000 - $19,435,00) / $500,000,000 = 7.21%
- Option :
- Explanation : Value of fund after a year = 200, 000, 000 / 0.2 = $240million. Management fee = $240,000,000 x 0.01 = $2.4million. Incentive fee net of management fees and in excess of 101.76 million Investor's return, net of fees = (240 - 200 - 2.4 - 1.76) / 200 = 17.92%
3. The following information is available about a hedge fund:
| Initial investment capital | £200 million |
| Return at the end of one year | 15% |
| Management fee based on assets under management | 2% |
| Incentive fee based on the return net of the management fee | 10 |
Assume management fees are calculated using end-of-period valuation.The investor's net return given this fee structure is closest to:
- Option : B
- Explanation : Management fee = 200 * 1.15 * 0.02 = £4.6 million Incentive fee = (230 -200 – 4.6 million) * 0.1 = £2.54 million Fund value after fees = £230 million – £4.6 million – £2.54 million = £222.86 million Investor return = (222.86 million / 200 million) - 1 = 11.43%
4. The following information is available about a hedge fund:
| Initial fund assets | $200 million |
| Fund assets at the end of the period (before fees) | $225 million |
| Management fee based on assets under management | 1% |
| Incentive fee based on the return | 15% |
| Soft hurdle rate | 12% |
No deposits to the fund or withdrawals from the fund occurred during the year. Management fees are calculated using end-of-period valuation.Management fees and incentive fees are calculated independently. The net-of-fees return of the investor is closest to:
- Option :
- Explanation : The soft hurdle rate is surpassed, because the return of the fund is 12.50%. For that reason, the full fee, based on the full performance, is due Management fee = 225 million * 0.01 = 2.25million. Incentive fee = $25million ∗ 0.15 = $3.75million. Total fees = $6million. Fund assets at the end of the period after fees = 225 – 6 =219 million. Return for the investor = (219 / 200) - 1 = 9.5%.
| Fund Value ($ millions) | ||
| Year | Before Fees | After Fees |
| 1 | 240 | 227.2 |
| 2 | 220 | 215.6 |
| 3 | 250 | ? |
The total amount of fees earned by the hedge fund in Year 3 is closest to:
- Option : B
- Explanation : Incentive fee is based on the performance relative to the previous highwater mark after fees. Management fee = $250 million * 0.02 = $5 million Incentive fee = ($250 million – $227.2 million) * 0.2 = $4.56 million Total fees = $5 million + $4.56 million = $9.56 million
