Question

A hedge fund with $1.2 billion of assets charges a management fee of 3% 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

Ans.

Given information in question

Fund value                  =          $1.2 billion

Management fee         = 3%

Incentive fee               =          20% if return over 5%

Management fee = 0.03 × $1.2 billion = $36 million

	Portfolio rate of return (%)	Incentive fee (%)	Incentive fee ($ million)	Total fee ($ million)	Total fee (%)
a	-3	0	0	36	3
b	0	0	0	36	3
c	5	0	0	36	3
d	10	20	12	48	4

In a,b and c the return is not above 5% so no incentive only management fee of 3% of $ 1.2 billion.

In d return is above 5% so incentive and management fee both will be charged.

The incentive fee is equal to 20% of the hedge fund’s profits beyond a particular benchmark rate of return i.e 5%.