You invested $1,250,000 with a market-neutral hedge fund manager. The fee struct

Question

You invested $1,250,000 with a market-neutral hedge fund manager. The fee structure is 2/20, and the fund has a high-water-mark provision. Suppose the first year the fund manager loses 7 percent, and the second year she gains 21 percent. Assume management fees are paid at the beginning of each year and performance fees are taken at the end of each year. What are the management and performance fees paid each year? (Leave no cells blank - be certain to enter "0" wherever required. Round your answers to 2 decimal places. Omit the "$" sign in your response.)

  

     Year 1      Year 2   Management fees $    $      Performance fees $    $   

Explanation / Answer

Solution :- Year 1

Management fees = 1250000 * 2 % = $ 25,000.

Performance fees = $ 0. (Negative return in Year 1, Accordingly, no performance fees will be paid to hedge fund manager).

Year 2

Management fees = [ (1250000 - 25000) * (1 - 0.07) * 2 % ]

= 1225000 * 0.93 * 2 %

= 1139250 * 2 %

= $ 22785.

Performance fees = [ { (1139250 - 22785) * (1 + 0.21) } - 1250000 ] * 0.21

= [ 1116465 * 1.21 - 1250000 ] * 0.21

= (1350922.65 - 1250000) * 0.21

= 100922.65 * 0.21

= $ 21193.76 (approx).

Conclusion:-

Year 1 Year 2 Management fees $ 25,000. $ 22,785. Performance fees $ 0 $ 21193.76

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