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Alternative Investments MCQ - Alternative Investments Section 2

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:

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:

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

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?

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

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:

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

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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Question:

An investor is contemplating investing $1000 million in either Giyani Hedge Fund or Beta Fund of Funds. Beta has a “1.25 and 15” fee structure and invests 15…

A. 18.6%.
B. 19.5%.
C. 20.5%.

Correct answer: B

Explanation:

Profit of Giyani Hedge Fund before fees = 1000million ∗ 0.3 = $300million. Management fee = $1000million ∗ 0.03 = $30million. Incentive fee = $300million ∗ 0.25 =…

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