You manage a hedge fund with $400 million in assets. Your fee structure provides for a 1% annual management fee with a 20% incentive on returns over an 8% benchmark. If the fund value is $445 million at the end of the year, what is your fee? a. $4,000,000

b. $6,600,000

c. $8,400,000

d. $2,600,000

b. $6,600,000

Explanation:

The computation of the fee is shown below:

= Annual management fee + performance management fee

where,

Annual management fee = $400 million * 0.01 = $4 million

And, the performance management fee

= Incentive percentage * hedge fund * excess return

= 20% * $400 million * 3.25%

= $2.6 million

The excess return is

= { ($445 million - $400 million) * $400 million - 8%}

= 11.25% - 8%

= 3.25%

So, the fee is

= $4 million + $2.6 million

= $6.6 million or $6,600,000