Alternative Investments Q73

0. An investor is contemplating investing $1000 million in either Giyani Hedge Fund or Beta Fund of Funds. Beta has a “1.25 and 15” fee structure and invests 15 percent of its assets under management in Giyani. Giyani has a standard “3 and 25” fee structure with no hurdle rate. Management fees are calculated on an annual basis on assets under management at the beginning of the year. Management fees and incentive fees are calculated independently. Giyani has a 30 percent return for the year before management and incentive fees. If an investor invests directly in Giyani Hedge Fund, her return is closest to:

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Option : B
Explanation : Profit of Giyani Hedge Fund before fees = 1000million ∗ 0.3 = $300million.
Management fee = $1000million ∗ 0.03 = $30million.
Incentive fee = $300million ∗ 0.25 = $75million.
Return to the investor =frac {300-30-75}{1000} = 19.5%

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