Alternative Investments Q65

65SHM 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, the fees earned by SHM in the second year is closest to:

Option : C
Explanation : Management fee = $225 million * 0.03 = $6.75 million
No incentive fee because the fund has declined in value
Total fees to SHM Capital = $6.75 million

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