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FRM Part I · FRM Exam Part I · Fund Management

A hedge fund has a high-water mark of $120 per unit. At the start of the year the net asset value is $100 per unit. During the year, before the incentive fee, the NAV rises to $132 per unit. The incentive fee is 20% of gains above the high-water mark, with no hurdle and ignoring the management fee. What is the NAV per unit after the incentive fee?

NAV per unit after the fee is $129.60. Only the $12 gain above the $120 high-water mark is subject to the 20% incentive fee, which is $2.40, so $132 less $2.40 gives $129.60.

  1. A$129.60Correct
  2. B$125.60
  3. C$132.00
  4. D$126.40

Explanation

Fee applies only to gains above the $120 high-water mark: $132 - $120 = $12. Fee = 20% x $12 = $2.40. NAV after fee = $132 - $2.40 = $129.60. Charging 20% on the full $32 rise gives $6.40 and NAV $125.60, which ignores the high-water mark.

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