
Explanation:
Management fee = $250 million × 2% = $5 million
Assets under management at end of period = $250 million × 1.16 = $290 million
Incentive fee = ($290 million - $250 million - $5 million) × 20% = $7 million
Total fees to Right-Lance Capital = $5 million + $7 million = $12 million
Investor's return = ($290 million - $250 million - $12 million)/$250 million = 11.20%
Q.3504 Right-Lance Capital is a hedge fund with $250 million as initial investment capital. A 2% management fee based on assets under management is charged at the beginning of the year, and a 20% incentive fee is charged on the performance net of management fees. In the first year of operations, the fund earned a return of 16%. What is the investor's effective return given this fee structure?
A
0.1094
B
0.112
C
0.125
D
0.0943
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