Hedge fund fees

CFA Level I Alternative Investments
#1

Hi,

help would be appricated with the below question:

Assume that a hedge fund returns 15% in a year are net of all fees. It’s fee structure is 2 and 20. What are the total fees charged by the management?

Solution: 6.25%

Thanks for the help

#2

First, it’s important to know whether or not the 20% performance fee is charged net of the management fee of 2%.

#3

It doesnt say but from the comments posted by other users I see that it should be net of fees.

#4

I’m having a tough time with this one. It is important to consider whether or not the management and performance fees are charged independet of eachother, which would result in higher fees being charged; or, if the performance fee is being charged after the management fee has been taken into account.

I’m not confident that you can solve this with the information is given. If the question doesn’t at least provide whether the two fees are charged together or independently, I don’t know how it can be concluded that 6.25% is the answer. Is there more information available?

#5

Also you need to consider if the fees are applied Beg or end of year. so yep the question is missing a lot of info.

But Assuming that management fee and incentive fee are independent you can solve it this way:

1- Management fee: 2% of 100 = 2%

2- Incentive fee = [100(1+X%) - 100] x 0.2

= 20X%

3 - total fees = 20X% + 2%

4- 100(1+X%) - (20X% + 2%) = 115

X% = 0.2125

5 - 121.25 - 115 = 6.25%