Explanation:
To calculate the incentive fee with a hard hurdle rate, we need to:
Calculate the fund's ending value:
$1,500,000$1,500,000 × (1 + 0.233) = $1,500,000 × 1.233 = $1,849,500Calculate the value needed to meet the hard hurdle rate:
$1,500,000 × (1 + 0.04) = $1,500,000 × 1.04 = $1,560,000Calculate the incentive fee base:
$1,849,500 - $1,560,000 = $289,500Calculate the incentive fee:
$289,500 × 0.15 = $43,425Verification:
$38,445) would be incorrect - this might be calculated by applying the incentive fee to the total return without considering the hurdle rate properly$43,425) is correct$52,425) would be incorrect - this might be calculated by applying the incentive fee to the total gain ($349,500 × 0.15 = $52,425) without considering the hurdle rateKey Concept: With a hard hurdle rate, the incentive fee is only calculated on returns that exceed the hurdle rate. This differs from a soft hurdle rate where the incentive fee applies to all returns if the hurdle rate is met.
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At the first of the year, an investor decides to invest $1.5 million in a hedge fund with an incentive fee of 15% and a hard hurdle rate of 4%. At the end of the year, the fund has a return of 23.3%. The incentive fee payment that the general partner of the fund earned based on this clients investment at the end of the year is closest to:
A
$38,445.
B
$43,425
C
$52,425.