Question

Consider a hedge fund with $200 million at the start of the year. The benchmark S&P 500 Index was up 16.5% during the same period. The gross return on assets is 21%, and the expense ratio is 2%. For each 1% above the benchmark return, the fund managers receive a .1% incentive bonus. What was the annual return on this fund?

Answer 1

Answer:

annual return = 18.04

Explanation:

given data

fund = $200 million

S&P 500 Index = 16.5%

gross return assets = 21%

expense ratio = 2%

benchmark return = 1%

incentive bonus = 0.1 %

to find out

annual return on this fund

solution

we get here first management cost for the year  that is

management cost = fund × gross return   .........................1

management cost = $200 million × 1.21

management cost = $242,000,000

so net return will be

net return = gross return assets - S&P 500 Index

net return = 21% - 16.5%

net return = 4.5%

so when we add this net return to expense ratio is

= 2 % + 4.5% (0.1 )

= 2.45 %

management cost   will be

management cost   = $242,000,000 × 2.45 %

management cost   = $5,929,000

so

annual return will be here as

annual return = $\frac{242000000-5929000-200000000}{200000000}$

annual return = 0.18035

annual return = 18.04