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16 September, 10:28

You manage a hedge fund with $400 million in assets. Your fee structure provides for a 1% annual management fee with a 20% incentive on returns over an 8% benchmark. If the fund value is $445 million at the end of the year, what is your fee? a. $4,000,000

b. $6,600,000

c. $8,400,000

d. $2,600,000

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  1. 16 September, 10:29
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    b. $6,600,000

    Explanation:

    The computation of the fee is shown below:

    = Annual management fee + performance management fee

    where,

    Annual management fee = $400 million * 0.01 = $4 million

    And, the performance management fee

    = Incentive percentage * hedge fund * excess return

    = 20% * $400 million * 3.25%

    = $2.6 million

    The excess return is

    = { ($445 million - $400 million) * $400 million - 8%}

    = 11.25% - 8%

    = 3.25%

    So, the fee is

    = $4 million + $2.6 million

    = $6.6 million or $6,600,000
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