Present Value of Hedge Fund fees - Exercise 2 (Homework) You are a hege fund man
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Present Value of Hedge Fund fees - Exercise 2 (Homework) You are a hege fund manager and you would like to know the present value of your fees. The hedge fund is a HF 2/20. There is no hurdle rate. The fund starts at the beginning of 2015 with a NAV of $250,000,000 and it is expected that the return is 20% in each year (also use this value as a discount rate for the present value). After three years, you would like to liquidate the fund and retire. . Calculate the present value of the hedge fund and of the hedge fund fees.Explanation / Answer
HF 2/20 fee structure means 2 % fees on the Net Asset Value as management fees and performance based compensation of 20% of the profit generated.
Since there is no hurdle rate, 20% performance based compensation needs to be paid on the entire profit generated.
Calculation of fees for each year is given below:
Present Value (PV) of Cash Flow:
(Cash Flow)/((1+i)^N)
i=Discount Rate=20%=0.2
N=Year of Cash Flow
N
A
B=A*0.02
C=A*0.2
D=0.2*C
E=B+D
F=A+C-E
Beginning
Management
Profit
Performance bsed
Total Fees
Ending
Year
NAV
Fees
for the year
Compensation
NAV
1
$250,000,000
$5,000,000
$50,000,000
$10,000,000
$15,000,000
$285,000,000
2
$285,000,000
$5,700,000
$57,000,000
$11,400,000
$17,100,000
$324,900,000
3
$324,900,000
$6,498,000
$64,980,000
$12,996,000
$19,494,000
$370,386,000
N
E
PV=E/(1.2^N)
Year
Fees
PV of fees
2015
1
$15,000,000
$ 12,500,000
2016
2
$17,100,000
$ 11,875,000
2017
3
$19,494,000
$ 11,281,250
SUM
$ 35,656,250
Present Value of Fees=$35,656,250
Value of Hedge Fund at the end of 2017=$370,386,000
Present Value (PV) of Cash Flow:
(Cash Flow)/((1+i)^N)
i=Discount Rate=20%=0.2
N=Year of Cash Flow
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