Alternative Investments Q74

74An 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. An investor invests in Beta Fund of Funds. The other investments in the Beta portfolio generate the same return before management fees as Giyani Hedge Funds and have the same fee structure as Giyani. Investor’s return is closest to:

Option : A
Explanation : Return earned by Beta = 1000million ∗ 0.195 = $195million.
Management fee = $1000million ∗ .0125 = $12.5million.
Incentive fee = $195million ∗ 0.15 = $29.25million.
Return to the investor = frac{195 – 12.5 – 29.25}{1000} = 15.33%.

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