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Alternative Investments - Alternative Investments Section 2

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16. 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, an investor’s net return for the second year is closest to:

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17. 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 and also includes the use of a high water mark, the fees earned by SHM in the third year is closest to:

  • Option : C
  • Explanation : Management fee = 250million x 0.03 = $7.5million. $239.92million
    represents the high-watermark established at the end of Year 1
    Incentive fee = ($250 – $239.92) * 0.15 = $1.512 million
    Total fees to SHM Capital = $7.5 + $1.512 = $9.012 million
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18. 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 and also includes the use of a high water mark, what is an investor’s net return for the third year?

  • Option : B
  • Explanation : Investor return = 10.42% The ending capital position at the end of Year 3 is $240.988 million. This is the new high-water mark
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19. 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 fee is calculated net of the management fee, and also includes the use of a high water mark, the fees earned by SHM in the second year is closest to:

  • Option : C
  • Explanation : Management fee = $225million ∗ 0.03 = $6.75million management fee
    No incentive fee because the fund has declined in value
    Total fees to SHM Capital =$6.75million
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20. 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. Given the fee structure in the previous question, the investor’s net return for the second year is closest to:

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Alternative Investments Section 2