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CFA Level I · CFA Level I Exam · Alternative Investment Features, Methods, and Structures

A hedge fund has a beginning NAV of $200 million, a 2% management fee on beginning NAV and a 20% incentive fee on returns above a 5% hard hurdle rate. The fee is calculated on gains after the management fee is deducted. The fund's gross return is 15%. The incentive fee is closest to:

The incentive fee is about $3.2 million. Gross gain of $30 million less the $4 million management fee is $26 million. Subtracting the $10 million hard hurdle leaves $16 million, and 20% of this excess is $3.2 million.

  1. A$3.2 millionCorrect
  2. B$3.6 million
  3. C$4.0 million

Explanation

Gross gain is $30 million. The management fee is $4 million, leaving a net gain of $26 million. The hurdle is 5% x $200 million = $10 million. Excess is $16 million, and 20% of that is $3.2 million. The $3.6 million option takes the incentive fee on the excess before the management fee is deducted, so it ignores the net-of-fee basis the question specifies.

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