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FRM Part II · FRM Exam Part II · Performing Due Diligence on Specific Managers and Funds

A fund has a 20% performance fee with a high-water mark and no hurdle. The net asset value per unit starts the year at 100, having previously peaked at 110. At year-end, before the performance fee, the NAV is 121. Ignoring management fees and crystallization timing issues, what is the performance fee per unit?

The performance fee is 2.20 per unit. A high-water mark means the manager earns incentive only on gains above the prior peak of 110, so the chargeable gain is 121 minus 110, or 11, and 20% of that is 2.20. Charging on the full 21 gain would be wrong.

  1. A2.20Correct
  2. B4.20
  3. C1.10
  4. D0.00

Explanation

The fee applies only to gains above the high-water mark of 110. Gain above it = 121 − 110 = 11. Fee = 20% × 11 = 2.20. Charging on the full 21 gain would give 4.20, ignoring the high-water mark.

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