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Alternative Investments - Alternative Investments Section 1

Avatto > > CFA Level 1 > > PRACTICE QUESTIONS > > Alternative Investments > > Alternative Investments Section 1

41. Which of the following is least likely to be a portfolio company valuation approach?

  • Option : B
  • Explanation : A comparable sales approach is used to value real estate.
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42. 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.
Which of the following is most likely to be the incentive fees earned?

  • Option : A
  • Explanation : Incentive Fee = (200 * 1.4 - 200) * 0.1 = $8 million.
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43. 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. Which of the following is most likely to be the effective return for the investor?

  • Option : A
  • Explanation : Effective Return = (Investment - Initial Capital - Total fees) / Initial Capital Total fees = Incentive fee + Management fee + $8 + (200 * 1.4 * 0.04) = $19.2 Effective Return = (280 - 200 - 19.2) / 200 = 30.4%
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44. 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-ofperiod valuation. Given that the incentive fee is calculated based on return net of management fee, which of the following is most likely to be the total fees earned by Zee Capital?

  • Option : B
  • Explanation : Management fees = 200 x 1.4 x 0.04 = 11.2
    Incentive fees = (200 x 1.4 – 200 – 11.2) x 10% = 6.88
    Total Fee = 11.2 + 6.88 = $ 18.08
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45. 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.
Assume that the fee structure specifies a hurdle rate of 5% and the the incentive fee is based on returns in excess of the hurdle rate. Furthermore, the performance fee is calculated net of the management fee. Which of the following is most likely to be the investor’s net return given this fee structure?

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Alternative Investments Section 1