A hedge fund with an initial value of $100 million has a management fee of 2% and an incentive fee of 20%. Management and incentive fees are calculated independently using end-of-period valuation. The value must reach the previous high-water mark before incentive fees are paid. The table below provides end-of-period fund values over the next three years.
Fund Value ($ millions) | ||
Year | Before Fees | After Fees |
1 | 120 | 113.6 |
2 | 110 | 107.8 |
3 | 125 | ? |
The total amount of fees earned by the hedge fund in Year 3 is closest to:
- $4.8 million.
- $5.5 million.
- $5.9 million.
Is ans 4.78?
Answer will be option A.
Mng fee is 2% of 125 = 2.5
Incentive fee is 20 % of 11.4 (125-113.6)= 2.28
Therefore total fees is= 2.5+2.28=4.78
We have taken 113.6 because in 2nd year fund made a loss, So now incentive fees will be given only when fund crosses 1st year’s high mark provision of 113.6 and above this we will give GP the incentive fee shown above.