Question

In: Finance

Use the information in the following table to answer the question. Note the fund started with...

Use the information in the following table to answer the question.

Note the fund started with 100 Net Asset Value at the start of 2012.

2012

2013

2014

2015

2016

2017

2018

2019

Return

8.0%

4.0%

1.7%

-4.5%

9.7%

10.7%

-0.3%

-14.1%

Asset Value

108.00

112.36

114.27

109.18

119.82

132.64

132.27

113.64

  1. Given the above hedge fund manager’s performance, which year(s) would the manager get paid on their high water mark? (1.5 marks).
  1. Calculate the rolling 3 years average returns and identify which year(s) the managers get paid the high water mark? (1.5 marks).
  1. Explain why managers are paid the high water mark during the years identified above (1 mark).

This is the only info I have

Solutions

Expert Solution

A high-water mark is the highest peak in value that an investment fund or account has reached. This term is often used in the context of fund manager compensation, which is performance-based.

a)

since hedge fund made 8% return in 2012 now it will get fees when it crosses hurdle rate of 8% that is

year 2016 9.7%

year 2017 10.7%

b)

year return average return of 3 years
2012 8%
2013 4%
2014 1.70% 4.57%
2015 -4.50% 0.40%
2016 9.70% 2.30%
2017 10.70% 5.30%
2018 -0.30% 6.70%
2019 -14.10% -1.23%

first hurdle rate is 4.57% hedge fund manager will be paid on average return higher than 4.57% i.e.

year 2017 - 5.3%

year 2018 - 6.7%

c)

A high-water mark is the highest peak in value that an investment fund or account has reached. This term is often used in the context of fund manager compensation, which is performance-based. The high-water mark ensures the manager does not get paid large sums for poor performance. If the manager loses money over a period, he must get the fund above the high-water mark before receiving a performance bonus from the assets under management (AUM).


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