FRM Part I · FRM Exam Part I · Fund Management
A hedge fund charges a 20% incentive fee on gains above a high-water mark, with no hurdle rate and no management fee. The fund starts with NAV per unit of 100, which is also the initial high-water mark. Year 1: the unit value reaches 120 before the incentive fee. Year 2: the unit value falls to 104. Year 3: the unit value reaches 125 before the incentive fee. What is the incentive fee per unit in Year 3?
The Year 3 incentive fee is 1.8 per unit. After the Year 1 fee, NAV is 116, which becomes the high-water mark. Only the gain from 116 to 125 is chargeable, and 20% of 9 is 1.8.
- A1.8Correct
- B1.0
- C4.2
- D5.0
Explanation
Year 1 fee is 20% x 20 = 4, so NAV is 116 and the high-water mark resets to 116. Year 2 produces no fee. In Year 3 the fee applies only to the gain above 116: 20% x (125 - 116) = 1.8. Charging on the rise from 104 gives 4.2, which ignores the high-water mark.
Did you get it right without looking?
One question tells you little. A timed set on Fund Management shows your real accuracy, how long you take and where you lose marks.
More Fund Management questions
- A fund has an 8% hurdle rate with a full catch-up and 20% carried interest, and uses a whole-fund (European) waterfall. LPs contributed $100…
- An open-end fund holds illiquid bonds and faces heavy redemptions during a market stress. Which statement best explains why open-end structu…
- An open-end mutual fund has total assets of $540 million, liabilities of $15 million, and 21 million shares outstanding at the close of trad…
- A hedge fund has a Sharpe ratio of 0.80, a return of 10%, and a risk-free rate of 2%. What is its standard deviation of returns?
- A researcher builds a hedge fund performance database from a commercial vendor in which funds report voluntarily. Funds that liquidate after…
- A closed-end fund has net assets of $180 million and 6 million shares. It trades at a 10% discount to NAV. An activist buys shares at market…