Question

Tuscin Capital is a hedge fund with an initial investment capital of $100 million. In its first year, the fund earns a return of 30%. The fund charges a 2% management fee based on assets under management at the end of the year and a 20% incentive fee with a hurdle rate of 4% (applicable on the beginning capital position for the year). The ending values of the fund (before fees for the current year) for the first 3 years are given below:

• 2009 = $130 million
• 2010 = $110 million
• 2011 = $140 million

Other information:

• A high water mark provision applies.
• The incentive fee is based on returns in excess of the hurdle rate and is calculated net of management fee.

Investors’ effective return for 2011 is closest to:

Group of answer choices

10.35%

22.86%

25.39%

Answer 1

Please see the table below. All financials are in $ million. Please see the second column to understand the mathematics.

	Linkage	2009	2010	2011
Opening value	A (100 on start, closing value of previous year subsequently)	100.00	122.72	107.80
Closing value before fees	B (Given)	130.00	110.00	140.00
Management fees	C = B x 2%	2.60	2.20	2.80
Hurdle	D = A x 4%	4.00	4.91	4.31
Incentive fees	E = max [(B - A - C - D) x 20%, 0]	4.68	-	5.02
Closing value after all fees	F = B - C - E	122.72	107.80	132.18

Approximate return in year 2011 = F / A - 1 = 132.18 / 107.80 - 1 = 22.62% which is closes to 22.86%

Hence, the correct answer is the second option showing 22.86%