Alternative Investments Q67

0. 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:

Answer
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Option : C
Explanation : 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

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