Alternative Investments MCQ - Alternative Investments Section 1

46 Zee Capital, a hedge fund with an initial investment capital of $200 million had a 40% return in its first year. At year end, a 4% management fee is charged based on the assets under management and a 10% incentive fee is charged. The management fee is calculated using end-of-period valuation.
The fund value declines to $250 million in the second year. Assuming the fee structure is the same as given in the information above but is inclusive of a high water mark, which of the following is most likely to be the fees earned by Zee Capital in the second year?

Management fee = 250 x 0.04 =10, because the fund declined in value, there is no incentive fee.

47 Cole Hedge Funds had an invested capital of $100 million. It earned a return of 25% in the first year. Given that it follows a 4 and 20 fee structure, and calculates the incentive and management fees independently, the net return for the investors is closest to:

Management fee = 100 * 1.25 * 0.04 = 5 million,
Incentive fee = (100 * 1.25 - 100) * 0.2 = 5
Return = (100 * 1.25 - 100 - 10) / 100 = 15%

48 The management fee for hedge funds is based on:

The management fee for hedge funds is based on assets under management.

49 IFT Capital is a hedge fund with PKR 100 million of initial investment capital. IFT charges a 2% management fee based on assets under management at year-end and a 20% incentive fee. The hurdle rate is 10% and the incentive fee is based on returns in excess of the hurdle rate. The incentive and management fees are calculated independently. The fund has a return of 30% for the first year. What is an investor’s net return given this fee structure?

Step 1: Calculate the management fee.
Value of investment at the end of first year (after return)
= 100 million * 1.30 = 130 million,
Management fee = 130 million * 0.02 = 2.6 million
Step 2: Calculate the incentive fee
Given a 10% hurdle rate, the amount to consider for the incentive fee
= 30 – 10 = 20 million
Incentive fee = 20 million * 0.20 = $4.0 million
Total fees earned = 2.6 million + 4.0 million = 6.6 million
Investor’s net return = (130.00 - 6.60) / 100 = (123.40 / 100) - 1 = 23.4%

50 A hedge fund had invested capital of 200 million on which it earned a return of 35% in its first year. It follows a 2 and 20 fee structure and calculates the incentive net of management fees. The total fee for the hedge fund in the first year is closest to:

Invested capital = 200,000,000
Value of fund after a year = 200,000,000 * 1.35 = 270,000,000
Management fee = 270,000,000 * 0.02 = 5,400,000
Incentive fees = (270,000,000 – 200,000,000 – 5,400,000) * 0.2
= 12,920,000
Total fee = 5,400,000 + 12,920,000 = 18,320,000.