Question 1
Multiple ChoiceVista Fund has the following profile:
AUM at prior year-end: $285 million
2% management fee (based on year-end AUM)
20% incentive fee (net of management fee), subject to:
5% soft hurdle
High-water mark of $355 million
Current-year fund return: 20% (gross)
The total fees earned by Vista Fund are closest to:
Explanation
End-of-year AUM (gross):
285 × 1.20 = 342Management fee (2% of gross AUM):
342 × 0.02 = 6.84Net of fee AUM:
342 − 6.84 = 335.16
Since 335.16 < HWM of 355, no incentive fee is paid.
Total fees = $6.84 million.
The high-water mark is the highest net asset value (NAV) that a fund has previously reached — after fees.
A hedge fund manager only earns an incentive fee on profits that exceed the highest NAV achieved in the past. This ensures the manager isn’t paid twice for the same performance.