CFA Level I · CFA Level I Exam · Alternative Investment Features, Methods, and Structures
A hedge fund manager charges a 20% incentive fee with a hard hurdle rate of 5%. The fund returned 12% for the year before the incentive fee. The incentive fee, as a percentage of beginning net asset value, is most likely:
The incentive fee is 1.4% of beginning net asset value. Under a hard hurdle, the manager earns 20% only on the return exceeding the 5% hurdle, which is 7%, so the fee is 0.20 × 7% = 1.4%.
- A1.4%Correct
- B2.4%
- C1.0%
Explanation
With a hard hurdle, the fee applies only to the return above the hurdle: 12% − 5% = 7%. The incentive fee is 20% × 7% = 1.4% of beginning net asset value. Charging 20% on the full 12% gives 2.4%, which ignores the hurdle (a soft hurdle treatment).
Did you get it right without looking?
One question tells you little. A timed set on Alternative Investment Features, Methods, and Structures shows your real accuracy, how long you take and where you lose marks.
More Alternative Investment Features, Methods, and Structures questions
- 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 hu…
- Which of the following is the most likely reason investors accept an illiquidity premium when investing in a private equity fund?
- Which of the following is most likely a feature that distinguishes a direct investment in infrastructure from an investment in publicly trad…
- Which of the following is most likely classified as an alternative investment category?
- Compared with traditional investments such as listed equities and government bonds, alternative investments are most likely to exhibit which…
- A fund has a committed capital of $200 million, a 2% management fee charged on committed capital, and a hurdle rate of 8% with a 20% carried…