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Problem 26-13 (Algo) Here are data on three hedge funds. Each fund charges its investors an incentive fee of 20% 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 20% incentive fee. For simplicity, assume also that management fees other than incentive fees are zero for all funds. Start of year value (millions) Gross portfolio rate of return Hedge Fund 1 Hedge Fund 2 Hedge Fund 3 $ 190 10% $ 190 20% $ 190 30% 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 20% 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 -30% rather than +30%. Recalculate your answers to parts (a) and (b).

Problem 26-13 (Algo) Here are data on three hedge funds. Each fund charges its investors an incentive fee of 20% 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 20% incentive fee. For simplicity, assume also that management fees other than incentive fees are zero for all funds. Start of year value (millions) Gross portfolio rate of return Hedge Fund 1 Hedge Fund 2 Hedge Fund 3 $ 190 10% $ 190 20% $ 190 30% 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 20% 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 -30% rather than +30%. Recalculate your answers to parts (a) and (b).

Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)
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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Problem 26-13 (Algo) Here are data on three hedge funds. Each fund charges its investors an incentive fee of 20% 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 20% incentive fee. For simplicity, assume also that management fees other than incentive fees are zero for all funds. Start of year value (millions) Gross portfolio rate of return Hedge Fund 1 Hedge Fund 2 Hedge Fund 3 $ 190 10% $ 190 20% $ 190 30% 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 20% 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 -30% rather than +30%. Recalculate your answers to parts (a) and (b).
Transcribed Image Text:Problem 26-13 (Algo) Here are data on three hedge funds. Each fund charges its investors an incentive fee of 20% 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 20% incentive fee. For simplicity, assume also that management fees other than incentive fees are zero for all funds. Start of year value (millions) Gross portfolio rate of return Hedge Fund 1 Hedge Fund 2 Hedge Fund 3 $ 190 10% $ 190 20% $ 190 30% 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 20% 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 -30% rather than +30%. Recalculate your answers to parts (a) and (b).
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