Alternative Investments Q49

0. 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?

Answer
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Option : B
Explanation : 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%

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