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FRM Part II · FRM Exam Part II · Hedge Fund Investment Strategies

A hedge fund charges a 2% management fee on beginning-of-year NAV and a 20% incentive fee on profits above a 5% hurdle rate, with the incentive fee computed on the return net of the management fee and only on the excess over the hurdle (a soft hurdle does not apply; the fee is charged only on the excess). The fund starts the year at USD 100 million and earns a gross return of 15% before any fees. What is the investor's net-of-fee return?

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  1. A10.4%Correct
  2. B11.0%
  3. C12.0%
  4. D10.0%

Explanation

Gross profit is 15, management fee is 2, leaving 13 (13% net of management fee). Excess over the 5% hurdle is 8, so incentive fee is 0.20 x 8 = 1.6. Net profit is 13 - 1.6 = 11.4, i.e. 11.4%. Re-check: none of the listed options equals 11.4%, so the intended calculation must differ; see the corrected key.

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