A fund of funds divides its money between five hedge funds that earn –5%, 1%, 10

Question

A fund of funds divides its money between five hedge funds that earn –5%, 1%, 10%, 15%, and 20% before fees in a particular year. The fund of funds charges 1 plus 10% and the hedge funds charge 2 plus 20%. The hedge funds’ incentive fees are calculated on the return after management fees. The fund of funds incentive fee is calculated on the net (after management fees and incentive fees) average return of the hedge funds in which it invests and after its own management fee has been subtracted. What is the overall return on the investments? How is it divided between the fund of funds, the hedge funds, and investors in the fund of funds

Explanation / Answer

HF1=2%+max[0,-5%-2%]*20%=2%.

HF2=2%+max[0,1%-2%]*20%=2%.

HF3=2%+max[0,10%-2%]*20%=3.6%.

HF4=2%+max[0,15%-2%]*20%=4.6%.

HF5=2%+max[0,20%-2%]*20%=5.6%.

R HF1=52=7.

R HF2=12=1.

RHF3=103.6=6.4.

RHF4=154.6=10.4.

R HF5=205.6=14.4

AveRHF=14.4%+10.4%+6.4%-1%-7%)/5=4.64%.

FF=1%+max[4.64%-1%]*10%=1.364%.

Investor return=4.64%-1.364%=3.276%.

Overall return=(20%+15%+10%+1%-5%)/5=8.2%.

So, the overall return on the investments is 8.2%, the fund of funds get 1.364%, the hedge funds get 3.56%, and investors in the fund of funds get 3.276%.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.