CFA CFA level 1- Alternative Investment

CFA Level I Alternative Investments
#1

A hedge fund has the following characteristics:

Assets under management, beginning of year $100 million
Assets under management, end of year $120 million
Management fee 1% of year-end assets under management
Performance fee 15% of the annual return above a 3% hurdle rate

If the performance fee is calculated net of the management fee and there were no capital contributions or withdrawals, the net annual return to the investor is closest to:

  1. 16.3%.
  2. 16.4%.
  3. 16.5%.
    Can someone help me understand the calculationstep please? The answer is 16.4%
#2

You pay a managment fee
1% x 120 = $1.2

PF is net of MF and there is a 3% hurdle.

  1. 3% hurdle - no PF fee until fund above 3% return . 100 x 3% = $3
  2. Fund performance net of MF. $20 performance - $1.2 = $18.8
  3. So PF calculated on return above hurdle after subtracting MF
    ($18.8 - $3) x 15% = $2.37
  4. Total fees $2.37 + $1.2 = $3.59
  5. NAV after fees = $120 - $3.59 = $116.41
  6. Return 116.41/100 - 1 = 16.41%
1 Like
#4

Thanks for explaining. Iā€™m still wondering if the calculation process remain the same if question includes Hurdle Rate?

#5

i mean hard hurdle rate

#6

That was a hard hurdle rate. Hard - only performace above the rate gets paid