Alternative Investments Q51

51BMB Capital is a hedge fund with a portfolio valued at $500,000,000 at the beginning of the year. One year later, the value of assets under management is $555,500,000. The hedge fund charges a 2% management fee based on the end-of-year portfolio value as well as a 15% incentive fee. If the incentive fee and management fee are calculated independently, the effective return for a hedge fund investor is closest to:

Option : A
Explanation : Management fee = $555,500,000 * 0.02 = $11,110,000
Incentive fee = ($555,500,000 – $500,000,000) * 0.15 = $8,325,000
Total fees = $19,435,000
Return = ($555,500,00 - $500,000,000 - $19,435,00) / $500,000,000 = 7.21%

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