You invested $1,500,000 with a market-neutral hedge fund manager. The fee struct

Question

You invested $1,500,000 with a market-neutral hedge fund manager. The fee structure is 2/20, and the fund has a high-water-mark provision. Suppose the first year the fund manager loses 9 percent, and the second year she gains 19 percent. Assume management fees are paid at the beginning of each year and performance fees are taken at the end of each year.

What are the management and performance fees paid each year? (Leave no cells blank - be certain to enter "0" wherever required. Round your answers to 2 decimal places. Omit the "$" sign in your response.)

You invested $1,500,000 with a market-neutral hedge fund manager. The fee structure is 2/20, and the fund has a high-water-mark provision. Suppose the first year the fund manager loses 9 percent, and the second year she gains 19 percent. Assume management fees are paid at the beginning of each year and performance fees are taken at the end of each year.

Explanation / Answer

Management fee for the 1st year = 2% of $1500000 = $30000

Management fee for the 2nd year = 2% of (1500000*.91) = $27300 ( since 9% loss is there)

Performance fee for 1st year = $ 0 because of negative return

Performance fee for 2nd year = 20% of .19*1365000= 20% of 259350 = $ 51870 ( since 19% gain is there so out of that 20% is retained)

I hope that this will resolve your query.

in above solution, it is assumed that loss also includes the management fee. so it is not separated

in case it is taken separately

then after 1 year , fund value = (1500000 - 30000) * (1-9%) = $ 1308300

So management fee in the beginning of year 2 = 1308300*.02 = $ 26166

so the amount upon which 19% return is gained = 1308300 - 26166 = 1282134

value of 19% return = .19*1282134 = $ 243605.46

in 2/20 case 20% of excess return is kept as a performance fee . since in this problem minimum return required is not mentioned. so 20% retention as a performace fee is kept of total return $ 243605.46

so performance fee in year 2 = .2*243605.46 = $ 48721.09

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