FRM Part I · FRM Exam Part I · Fund Management
A fund of funds invests in underlying hedge funds that deliver a 14% return to the fund of funds after the underlying funds' own fees. The fund of funds charges its investors a 1% management fee on assets and a 10% incentive fee on the return remaining after its management fee. What is the net return to the fund-of-funds investors?
Investors net 11.7%. The 14% return less a 1% management fee leaves 13%, and the 10% incentive fee on that is 1.3 percentage points. The result is 11.7%, after the second layer of fees.
- A11.7%Correct
- B11.6%
- C12.6%
- D13.0%
Explanation
After the 1% management fee the return is 13%. The incentive fee is 10% x 13% = 1.3%. The investor return is 13 - 1.3 = 11.7%. Charging the incentive on 14% gives 1.4% and 11.6%, which uses the wrong fee base.
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