FRM Part II · FRM Exam Part II · Hedge Fund Investment Strategies
A hedge fund has a high-water mark of USD 120 per unit. The unit value fell to USD 100 last year and rises to USD 130 this year before fees. The incentive fee is 20% with a high-water mark and no hurdle; ignore management fees. What is the incentive fee per unit this year?
The high-water mark means the manager earns fees only on gains above USD 120. The unit ends at USD 130, so the excess is USD 10 and the 20% incentive fee is USD 2.0 per unit.
- AUSD 2.0
- BUSD 4.0Correct
- CUSD 6.0
- DUSD 8.0
Explanation
Incentive applies only to gains above the high-water mark: 130 - 120 = 10. Fee = 20% x 10 = USD 2.0. Computing on the 30 rise from 100 gives USD 6.0, ignoring the high-water mark.
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