Here are data on three hedge funds. Each fund charges its investors an incentive fee of 10% of total returns. Suppose initially that a fund of funds (FF) manager buys equal amounts of each of these funds, also charging its investors a 10% incentive fee. For simplicity, assume also that management fees other than incentive fees are zero for all funds. Hedge Fund 1 Hedge Fund 2 Hedge Fund 3 Start of year value (millions) $ 120 $ 120 $ 120 Gross portfolio rate of return 15 % 30% 45% Required: a. Compute the rate of return after incentive fees to an investor in the fund of funds. b. Suppose that instead of buying shares in each of the three hedge funds, a stand-alone (SA) hedge fund purchases the same portfolio as the three underlying funds. The total value and composition of the SA fund is therefore identical to the one that would result from aggregating the three hedge funds. Consider an investor in the SA fund. After paying 10% incentive fees, what would be the value of the investor's portfolio at the end of the year? d. Now suppose that the return on the portfolio held by hedge fund 3 were -45% rather than +45 %. Recalculate your answers to parts (a) and (b).

Here are data on three hedge funds. Each fund charges its investors an incentive fee of 10% of total returns. Suppose initially that a fund of funds (FF) manager buys equal amounts of each of these funds, also charging its investors a 10% incentive fee. For simplicity, assume also that management fees other than incentive fees are zero for all funds. Hedge Fund 1 Hedge Fund 2 Hedge Fund 3 Start of year value (millions) $ 120 $ 120 $ 120 Gross portfolio rate of return 15 % 30% 45% Required: a. Compute the rate of return after incentive fees to an investor in the fund of funds. b. Suppose that instead of buying shares in each of the three hedge funds, a stand-alone (SA) hedge fund purchases the same portfolio as the three underlying funds. The total value and composition of the SA fund is therefore identical to the one that would result from aggregating the three hedge funds. Consider an investor in the SA fund. After paying 10% incentive fees, what would be the value of the investor's portfolio at the end of the year? d. Now suppose that the return on the portfolio held by hedge fund 3 were -45% rather than +45 %. Recalculate your answers to parts (a) and (b).

Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)

7th Edition

ISBN:9780357033609

Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Chapter13: Investing In Mutual Funds, Etfs, And Real Estate

Section: Chapter Questions

Problem 2FPE

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Suppose you are the money manager of a $4.82 millioninvestment fund. The fund consists of four stocks with the following investments and betas:Stock Investment BetaA $ 460,000 1.50B 500,000 (0.50)C 1,260,000 1.25D 2,600,000 0.75 If the market’s required rate of return is 8% and the risk-free rate is 4%, what is the fund’srequired rate of return?8-8 BETA COEFFICIENT Given t
Suppose you are the money manager of a $4.82 millioninvestment fund. The fund consists of four stocks with the following investments and betas:Stock Investment BetaA $ 460,000 1.50B 500,000 (0.50)C 1,260,000 1.25D 2,600,000 0.75If the market’s required rate of return is 8% and the risk-free rate is 4%, what is the fund’s required rate of return?
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