Alternative Investments Q55

55A hedge fund with an initial value of $200 million has a management fee of 2% and an incentive fee of 20%. Management and incentive fees are calculated independently using end-of-period valuation. The value must reach the previous high water mark before incentive fees are paid. The table below provides end-of-period fund values over the next three years.

	Fund Value ($ millions)
Year	Before Fees	After Fees
1	240	227.2
2	220	215.6
3	250	?

The total amount of fees earned by the hedge fund in Year 3 is closest to:

Option : B
Explanation : Incentive fee is based on the performance relative to the previous highwater mark after fees. Management fee = $250 million * 0.02 = $5 million Incentive fee = ($250 million – $227.2 million) * 0.2 = $4.56 million Total fees = $5 million + $4.56 million = $9.56 million

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