ABC CAPITAL is a hedge fund with $300 million of initial investment capital. They charge a 2 percent management fee based on assets under management and a 20 percent incentive fee. In its first year, ABC Capital has a 20 percent return. Assume management fees are calculated using beginning-of-period valuation. 1. What are the fees earned by ABC if the incentive and management fees are calculated independently? What is an investor’s effective return given this fee Structure? 2. What are the fees earned by ABC assuming that the incentive fee is calculated based on return net of the management fee? What is an investor’s net return given this fee structure? 3. If the fee structure specifies a hurdle rate of 5 percent and the incentive fee is based on returns in excess of the hurdle rate, what are the fees earned by ABC assuming the performance fee is calculated net of the management fee? What is an investor’s net return given this fee structure? 4. In the second year, the fund value declines to $210 million. The fee structure is as specified for question 1 but also includes the use of a high water mark. What are the fees earned by ABC in the second year? What is an investor’s net return for the second year given this fee structure? 5. In the third year, the fund value increases to $528 million.The fee structure is as specified in questions 1 and 4. What are the fees earned by ABC in the third year? What is an investor’s net return for the third year given this fee structure?"
ABC CAPITAL is a hedge fund with $300 million of initial investment capital. They charge a 2 percent management fee based on assets under management and a 20 percent incentive fee. In its first year, ABC Capital has a 20 percent return. Assume management fees are calculated using beginning-of-period valuation.
1. What are the fees earned by ABC if the incentive and management fees are calculated independently? What is an investor’s effective return given this fee Structure?
2. What are the fees earned by ABC assuming that the incentive fee is calculated based on return net of the management fee? What is an investor’s net return given this fee structure?
3. If the fee structure specifies a hurdle rate of 5 percent and the incentive fee is based on returns in excess of the hurdle rate, what are the fees earned by ABC assuming the performance fee is calculated net of the management fee? What is an investor’s net return given this fee structure?
4. In the second year, the fund value declines to $210 million. The fee structure is as specified for question 1 but also includes the use of a high water mark. What are the fees earned by ABC in the second year? What is an investor’s net return for the second year given this fee structure?
5. In the third year, the fund value increases to $528 million.The fee structure is as specified in questions 1 and 4. What are the fees earned by ABC in the third year? What is an investor’s net return for the third year given this fee structure?"
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