FRM Part I · FRM Exam Part I · Fund Management
A hedge fund has a beginning NAV per share of $100 and a high-water mark of $110. It charges a 20% incentive fee on gains above the high-water mark, with no hurdle and no management fee. At year end, before the incentive fee, NAV per share is $121. What is the NAV per share after the incentive fee?
The incentive fee applies only to the gain above the $110 high-water mark, which is $11. Twenty percent of that is $2.20, so NAV per share falls from $121 to $118.80. Gains from $100 to $110 only recover prior losses and bear no fee.
- A$118.80Correct
- B$96.80
- C$121.00
- D$119.00
Explanation
Gain above the high-water mark = 121 - 110 = $11. Incentive fee = 20% x 11 = $2.20. NAV after fee = 121 - 2.20 = $118.80. Charging 20% on the full gain from $100 would give $116.80... wrongly including gains below the mark.
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