Question 1
Multiple Choice
Confidence Level
0%
Luna Partners is a hedge fund with $150 million of assets under management at the end of the prior year. The fund has a "2 and 20" fee structure. Incentive fees are calculated on gains net of management fees at the end of the year. In the current year, Luna Partners earned an 8% gross return. An investor's after-fee return for the year is closest to:
Explanation
Gross value end of year: $150 million × 1.08 = $162 million
Management fee: $162 million × 2% = $3.24 million
Incentive fee: ($162 – $150 – $3.24) × 20% = $1.752 million
Total fees to Luna Partners = $3.24 million + $1.752 million = $4.992 million
The after-fee return: [($162 – $4.992) / $150] – 1 = 5.8%
Question 2
Multiple Choice
Confidence Level
0%
Orion Strategies is a hedge fund with $300 million of assets under management at the end of the prior year. The fund uses a "1.5 and 15" fee structure. Incentive fees are calculated on gains net of management fees at the end of the year. In the current year, Orion Strategies earned a 12% gross return. An investor's after-fee return for the year is closest to:
Explanation
Gross value end of year: $300 million × 1.12 = $336 million
Management fee: $336 million × 1.5% = $5.04 million
Incentive fee: ($336 – $300 – $5.04) × 15% = $4.491 million
Total fees to Orion Strategies = $5.04 million + $4.491 million = $9.531 million
The after-fee return: [($336 – $9.531) / $300] – 1 = 9.8%
Question 3
Multiple Choice
Confidence Level
0%
Summit Capital is a hedge fund with $175 million of assets under management at the end of the prior year. The fund has a "2 and 20" fee structure. Incentive fees are calculated on gains net of management fees at the end of the year. In the current year, Summit Capital earned a 7% gross return. An investor's after-fee return for the year is closest to:
Explanation
Gross value end of year: $175 million × 1.07 = $187.25 million
Management fee: $187.25 million × 2% = $3.745 million
Incentive fee: ($187.25 – $175 – $3.745) × 20% = $1.701 million
Total fees to Summit Capital = $3.745 million + $1.701 million = $5.446 million
The after-fee return: [($187.25 – $5.446) / $175] – 1 = 5.4%
Question 4
Multiple Choice
Confidence Level
0%
Atlas Growth Fund is a hedge fund with $250 million of assets under management at the end of the prior year. The fund has a "2 and 15" fee structure. Incentive fees are calculated on gains net of management fees at the end of the year. In the current year, Atlas Growth earned a 10% gross return. An investor's after-fee return for the year is closest to:
Explanation
Gross value end of year: $250 million × 1.10 = $275 million
Management fee: $275 million × 2% = $5.5 million
Incentive fee: ($275 – $250 – $5.5) × 15% = $2.925 million
Total fees to Atlas Growth = $5.5 million + $2.925 million = $8.425 million
The after-fee return: [($275 – $8.425) / $250] – 1 = 7.7%
Question 5
Multiple Choice
Confidence Level
0%
Beacon Hill Investments is a hedge fund with $220 million of assets under management at the end of the prior year. The fund has a "1 and 20" fee structure. Incentive fees are calculated on gains net of management fees at the end of the year. In the current year, Beacon Hill earned a 6% gross return. An investor's after-fee return for the year is closest to:
Explanation
Gross value end of year: $220 million × 1.06 = $233.2 million
Management fee: $233.2 million × 1% = $2.332 million
Incentive fee: ($233.2 – $220 – $2.332) × 20% = $2.1736 million
Total fees to Beacon Hill = $2.332 million + $2.1736 million = $4.5056 million
The after-fee return: [($233.2 – $4.5056) / $220] – 1 = 4.5%
Question 6
Multiple Choice
Confidence Level
0%
Ironwood Capital is a hedge fund with $90 million of assets under management at the end of the prior year. The fund uses a "1.5 and 10" fee structure. Incentive fees are calculated on gains net of management fees at the end of the year. In the current year, Ironwood Capital earned a 9% gross return. An investor's after-fee return for the year is closest to:
Explanation
Gross value end of year: $90 million × 1.09 = $98.1 million
Management fee: $98.1 million × 1.5% = $1.4715 million
Incentive fee: ($98.1 – $90 – $1.4715) × 10% = $0.66285 million
Total fees to Ironwood Capital = $1.4715 million + $0.66285 million = $2.13435 million
The after-fee return: [($98.1 – $2.13435) / $90] – 1 = 6.8%
Question 7
Multiple Choice
Confidence Level
0%
Everest Alternative Fund is a hedge fund with $110 million of assets under management at the end of the prior year. The fund uses a "1 and 20" fee structure. Incentive fees are calculated on gains net of management fees at the end of the year. In the current year, Everest earned a 6% gross return. An investor's after-fee return for the year is closest to:
Explanation
Gross value end of year: $110 million × 1.06 = $116.6 million
Management fee: $116.6 million × 1% = $1.166 million
Incentive fee: ($116.6 – $110 – $1.166) × 20% = $1.0868 million
Total fees to Everest = $1.166 million + $1.0868 million = $2.2528 million
The after-fee return: [($116.6 – $2.2528) / $110] – 1 = 4.3%
Question 8
Multiple Choice
Confidence Level
0%
A hedge fund has $200 million in starting capital and charges a 2% management fee and a 20% incentive fee. In Year 1, the fund returns 30%. Fees are calculated independently and based on year-end assets. What is the investor’s after-fee return?
Explanation
End value = $200M × 1.30 = $260M
Management Fee = 2% × $260M = $5.2M
Incentive fee = ($260M – $200M) × 20% = $12M
Net to investor = $260M – $5.2M – $12M = $242.8M
After-fee return = ($242.8M / $200M) – 1 = 21.4%
Question 9
Multiple Choice
Confidence Level
0%
Fund Alpha begins the year with $100 million and ends the year with a 10% return. The fund charges 2% of year-end AUM and 20% of profits as incentive. What is the investor’s after-fee return?
Explanation
End value = $110M
Management Fee = 2% × $110M = $2.2M
Incentive fee = ($110M – $100M) × 20% = $2M
Net = $110M – $2.2M – $2M = $105.8M
Return = ($105.8M / $100M) – 1 = 5.8%
Question 10
Multiple Choice
Confidence Level
0%
With a 2-and-20 fee structure, a $50 million hedge fund earns a 40% return. What is the after-fee return?
Explanation
End value = $70M
Management Fee = 2% × $70M = $1.4M
Incentive = ($70M – $50M) × 20% = $4M
Net = $70M – $1.4M – $4M = $64.6M
Return = ($64.6M / $50M) – 1 = 29.2%