Alternative Investments Q54

54The 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%.

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