Question

You manage a hedge fund with $400 million in assets. Your fee structure provides for a 1% annual management fee with a 20% incentive on returns over an 8% benchmark. If the fund value is $445 million at the end of the year, what is your fee?a. $4,000,000
b. $6,600,000
c. $8,400,000
d. $2,600,000

Answer 1

Answer:

b. $6,600,000

Explanation:

The computation of the fee is shown below:

= Annual management fee  + performance management fee

where,

Annual management fee = $400 million × 0.01 = $4 million

And, the performance management fee

= Incentive percentage × hedge fund × excess return

= 20% × $400 million × 3.25%

= $2.6 million

The excess return is

= {($445 million - $400 million) × $400 million -  8%}

= 11.25%  - 8%

= 3.25%

So, the fee is

= $4 million + $2.6 million

= $6.6 million or $6,600,000