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Alternative Investments - Alternative Investments Section 2

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11. SHM Capital is a hedge fund with $200 million of initial investment capital. They charge a 3 percent management fee based on assets under management at year-end and a 15 percent incentive fee. In its first year, SHM Capital has a 28 percent return. Assume management fees are calculated using end-of-period valuation. If the fee structure specifies a hurdle rate of 8% percent and the incentive fee is based on returns in excess of the hurdle rate, what are the fees earned by SHM assuming the performance fee is calculated net of the management fee?

  • Option : A
  • Explanation : Management fee = $256 million * 0.03 = $7.68 million
    Incentive fee = ($256 – $200 – $16 – $7.68) million * 0.15 = $4.848 million
    Total fees to SHM Capital = $12.528 million
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12. SHM Capital is a hedge fund with $200 million of initial investment capital. They charge a 3 percent management fee based on assets under management at year-end and a 15 percent incentive fee. In its first year, SHM Capital has a 28 percent return. Assume management fees are calculated using end-of-period valuation. If the fee structure specifies a hurdle rate of 8% percent and the incentive fee is based on returns in excess of the hurdle rate, what is an investor’s net return?

  • Option : C
  • Explanation : Investor’s return = ($256 - $200 - $12.528) / $200 = 21.74%
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13. SHM Capital is a hedge fund with $200 million of initial investment capital. They charge a 3 percent management fee based on assets under management at year-end and a 15 percent incentive fee. In its first year, SHM Capital has a 28 percent return. Assume management fees are calculated using end-of-period valuation. If the fee structure specifies a hurdle rate of 8% percent and the incentive fee is based on returns in excess of the hurdle rate, what are the fees earned by SHM assuming the incentive and management fees are calculated independently?

  • Option : B
  • Explanation : Management fee = $256 million * 0.03 = $7.68 million
    Incentive fee = ($256 – $200 – $16) million * 0.15 = $6.00 million
    Total fees to SHM Capital = $13.68 million
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14. SHM Capital is a hedge fund with $200 million of initial investment capital. They charge a 3 percent management fee based on assets under management at year-end and a 15 percent incentive fee. In its first year, SHM Capital has a 28 percent return. Assume management fees are calculated using end-of-period valuation. If the fee structure specifies a hurdle rate of 8% percent and the incentive fee is based on returns in excess of the hurdle rate, what is an investor’s net return assuming the incentive and management fees are calculated independently?

  • Option : B
  • Explanation : Investor’s return = ($256 - $200 - $13.68) / $200 = 21.16%
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15. SHM Capital is a hedge fund with $200 million of initial investment capital. They charge a 3 percent management fee based on assets under management at year-end and a 15 percent incentive fee. In its first year, SHM Capital has a 28 percent return. Assume management fees are calculated using end-of-period valuation. In the second year, the fund value declines to $225 million. In the third year, the fund value increases to $250 million. If the incentive and management fees are calculated independently, the fees earned by SHM in the second year is closest to:

  • Option : C
  • Explanation : Management fee = $225 million * 0.03 = $6.75 million
    No incentive fee because the fund has declined in value
    Total fees to SHM Capital = $6.75 million
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Alternative Investments Section 2