Series 7 practice questionhardAlternative Investments — Hedge Funds
A hedge fund starts the year with $100 million in assets. The fund earns a 15% return and charges 2% management fee and 20% incentive fee. Assuming the management fee is deducted first, what is the total dollar amount of fees collected?
- A$4.6 million✓ Correct answer
- B$2.0 million
- C$5.0 million
- D$4.0 million
Explanation
Why A — $4.6 million
Management fee: 2% x $100M = $2.0M. After the management fee, assets are $98M. The 15% gross return on $100M = $15M, minus the $2M management fee = $13M net gain. Performance fee: 20% x $13M = $2.6M. Total fees = $2.0M + $2.6M = $4.6M. Some funds calculate fees differently, but this method of deducting management fees before calculating incentive fees is common.
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