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Alternative Investments - Alternative Investments Section 2

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6. The management fee of a hedge fund that has not yet invested all of its committed capital is most likely based on:

  • Option : A
  • Explanation : The management fee of hedge funds is based on invested capital until the committed capital is fully drawn down and invested. This approach is in contrast to private equity funds, for which the management fee is based on committed capital.
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7. SHM Capital is a hedge fund with $200 million of initial investment capital. They charge a 3 percent management fee based on assets under management at year-end and a 15 percent incentive fee. In its first year, SHM Capital has a 28 percent return. Assume management fees are calculated using end-of-period valuation. If the incentive and management fees are calculated independently, the fees earned by SHM is closest to:

  • Option : C
  • Explanation : Value of the fund at the end of year = 200 * 1.28 = 256
    Management fee = $256 million * 0.03 = $7.68 million
    Incentive fee = ($256 – $200) million * 0.15 = $8.4 million
    Total fees to SHM Capital = $16.08 million
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8. SHM Capital is a hedge fund with $200 million of initial investment capital. They charge a 3 percent management fee based on assets under management at year-end and a 15 percent incentive fee. In its first year, SHM Capital has a 28 percent return. Assume management fees are calculated using end-of-period valuation. What is an investor’s effective return if the incentive and management fees are calculated independently?

  • Option : B
  • Explanation : Investor return = ($256 - $200 - $16.08) / $200 = 19.96%
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9. SHM Capital is a hedge fund with $200 million of initial investment capital. They charge a 3 percent management fee based on assets under management at year-end and a 15 percent incentive fee. In its first year, SHM Capital has a 28 percent return. Assume management fees are calculated using end-of-period valuation. If the incentive fee is calculated based on return net of the management fee, the fees earned by SHM is closest to:

  • Option : B
  • Explanation : Management fee = 256million x 0.03 = $7.68million.
    Incentive fee = ($256– $200– $7.68)million ∗ 0.15 = $7.24million. Total
    fees to SHM Capital =14.928 million
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10. SHM Capital is a hedge fund with $200 million of initial investment capital. They charge a 3 percent management fee based on assets under management at year-end and a 15 percent incentive fee. In its first year, SHM Capital has a 28 percent return. Assume management fees are calculated using end-of-period valuation. What is an investor’s effective return if the incentive fee is calculated based on return net of the management fee?

  • Option : C
  • Explanation : Investor’s return = (256 − $200 − $14.928)/200 = 20.54%
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Related Quiz.
Alternative Investments Section 2