Chartered Financial Analyst Level 1
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An analyst evaluates a hedge fund with the following details:
- Beginning-of-year assets under management (AUM): €200 million
- Management fee (based on end-of-year AUM before fees): 1.5%
- Incentive fee: 20%
- Hard hurdle rate: 5%
- Annual return before fees: 15%
If the incentive fee is calculated net of management fees, the total fees for the year are closest to:
An analyst evaluates a hedge fund with the following details:
- Beginning-of-year assets under management (AUM): €200 million
- Management fee (based on end-of-year AUM before fees): 1.5%
- Incentive fee: 20%
- Hard hurdle rate: 5%
- Annual return before fees: 15% If the incentive fee is calculated net of management fees, the total fees for the year are closest to:
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Explanation:
Explanation
The correct answer is A (€6.8 million). Here's the breakdown:
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End-of-Year AUM Calculation:
- Beginning AUM: €200 million
- Annual return before fees: 15%
- End-of-year AUM before fees: €200 million * 1.15 = €230 million
-
Management Fee:
- 1.5% of €230 million = €3.45 million
-
Incentive Fee Calculation (Net of Management Fees and Hard Hurdle Rate):
- Hard hurdle rate: 5% of €200 million = €10 million
- Net AUM for incentive fee: €230 million - €200 million - €3.45 million - €10 million = €16.55 million
- Incentive fee: 20% of €16.55 million = €3.31 million
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Total Fees:
- Management fee + Incentive fee = €3.45 million + €3.31 million = €6.76 million ≈ €6.8 million
Why not B or C?
- B (€7.5 million) incorrectly calculates the incentive fee gross of management fees.
- C (€8.8 million) excludes the hard hurdle rate in the incentive fee calculation.