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10 November, 05:02

A hedge fund with $1 billion of assets charges a management fee of 2% and an incentive fee of 20% of returns over a money market rate, which currently is 5%. Calculate total fees, both in dollars and as a percent of assets under management, for portfolio returns of:

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  1. 10 November, 07:07
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    Missing information:

    a. - 5%

    b. 0

    c. 5%

    d. 10%

    Answer:

    a. only management fees = $20,000,000

    b. only management fees = $20,000,000

    c. only management fees = $20,000,000

    d. $30,000,000 (management fees + $10 million incentive fee)

    Explanation:

    management fee 2%

    incentive fee 20% of returns if total returns are over 5%

    common fees for every situation (managers always win even if investors lose):

    $1,000,000,000 x 2% = $20,000,000

    a. - 5%, no incentive fee

    b. 0, no incentive fee

    c. 5%, no incentive fee

    d. 10%, incentive fee = (10% - 5%) x 20% x $1,000,000,000 = $10,000,000
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