Skip to content

FRM Part II · FRM Exam Part II · Illiquid Assets

An investor requires a net return of 8.0% on a private fund. A comparable liquid fund yields an expected 6.5% gross with no trading frictions. The private fund is expected to earn a gross 9.5% but charges 1.0% annual fees and has estimated annualized illiquidity cost for exit and delayed access of 0.5%. What is the net expected return after fees and illiquidity cost, and does it meet the requirement?

The net expected return is 8.0%, found by deducting 1.0% fees and 0.5% illiquidity cost from the 9.5% gross return. This exactly equals the investor's 8.0% requirement, so the fund just meets the hurdle. Ignoring fees or illiquidity cost would overstate the return.

  1. A8.0%, meets the requirement exactlyCorrect
  2. B9.0%, exceeds the requirement because illiquidity cost is ignored
  3. C8.5%, meets the requirement
  4. D7.5%, does not meet the requirement because the premium over liquid is insufficient

Explanation

Net = 9.5% - 1.0% fees - 0.5% illiquidity cost = 8.0%, equal to the 8.0% hurdle. 9.0% deducts only the illiquidity-free fee error; 8.5% deducts only fees... check: 9.5-1.0 = 8.5 omits illiquidity cost; 9.5-0.5 = 9.0 omits fees; 7.5 deducts a double illiquidity cost.

Did you get it right without looking?

One question tells you little. A timed set on Illiquid Assets shows your real accuracy, how long you take and where you lose marks.

Practise Illiquid AssetsFree diagnostic mock

More Illiquid Assets questions