FRM Part I · FRM Exam Part I · Fund Management
A hedge fund begins the year with $100 million of investor capital. It charges a management fee of 2% of beginning assets and an incentive fee of 20% of profit after the management fee, with no hurdle rate. The fund earns a gross return of 15% before any fees. What is the investors' net return for the year?
The net return is 10.4%. Gross profit of $15m less a $2m management fee leaves $13m, on which the 20% incentive fee is $2.6m. Investors keep $10.4m on $100m of capital.
- A10.4%Correct
- B10.0%
- C12.0%
- D13.0%
Explanation
Gross profit is $15m. The management fee is $2m, leaving $13m. The incentive fee is 20% x 13 = $2.6m. Investors keep 15 - 2 - 2.6 = $10.4m, a 10.4% return. Charging the incentive fee on the $15m gross profit gives $3m and a 10.0% return, which ignores that the fee base is after the management fee.
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