Question

A hedge fund with $1.7 billion of assets charges a management fee of 2% and an incentive fee of 20% of returns over a money market rate, which currently is 5%. Calculate total fees, both in dollars and as a percent of assets under management, for portfolio returns of: (Enter your answers in millions rounded to 1 decimal place.)

Portfolio Rate of Return (%) Total Fee ($ million)    Total Fee (%)

a. −3%

b. 0%

c. 5%

d. 10%

Answer 1

Final answer is in point d)

a) Calculation of Management Fees

Management Fees will be charged to the investor irrespective of the return of portfolio.

Therefore , Management Fees = $1.7 billion * 2% = $ 34 million.

b) Calculation of Incentive Fees

Incentive Fees will be charged if the gross return of the portfolio exceeds %

Return	Incentive Fees (in million)	Calculation
-3	0	Not Applicable as return does not exceeds 5 %
0	0	Not Applicable as return does not exceeds 5 %
5	0	Not Applicable as return does not exceeds 5 %
10	1.7	0.20 (10%-5%) * $1.7 billion

c) Computation of Value of Asset

Return (a)	Opening Value (in million)	Closing Value (Opening value + return)
-3	1700	1649
0	1700	1700
5	1700	1785
10	1700	1870

d) Final Answer

Return	Incentive Fees        (in million)	Management Fees (in million )	Total Fees	Value of Asset in million	Fees as % of asset    (Total Fees/Value of Assets) * 100
-3	0	34	34	1649	2.06%
0	0	34	34	1700	2.00%
5	0	34	34	1785	1.90%
10	1.7	34	35.7	1870	1.91%