Explanation:
Step 1: Calculate gross return value
$80 million$80 million × 25% = $20 millionStep 2: Calculate year-end AUM before fees
$80 million + $20 million = $100 millionStep 3: Calculate management fee
$100 million × 2% = $2 millionStep 4: Calculate incentive fee
$20 million × 20% = $4 millionStep 5: Calculate total fees
$2 million + $4 million = $6 millionStep 6: Calculate AUM after fees
$100 million - $6 million = $94 millionStep 7: Verify calculation
$80 million$20 million$2 million (2% of $100 million)$4 million (20% of $20 million)$6 million$80 million + $20 million - $6 million = $94 millionWhy Option B ($94.4 million) is incorrect:
Some might incorrectly calculate the incentive fee on the net return after management fee, but the problem states "management and incentive fees are calculated independently," meaning the incentive fee is based on gross return, not net return after management fee.
Why Option C ($97.6 million) is incorrect:
This would result from only charging one fee or miscalculating the fees significantly.
Correct answer is $94.0 million (Option A).
Ultimate access to all questions.
An analyst gathers the following information about a hedge fund's fee structure:
| Assets under management (AUM), beginning of period | $80 million |
|---|---|
| Management fee, based on year-end AUM | 2% |
| Incentive fee | 20% |
The management and incentive fees are calculated independently. If the hedge fund generates a gross return of 25%, the assets under management after fees at the end of the period are closest to:
A
$94.0 million.
B
$94.4 million.
C
$97.6 million.
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