# Investors' return for the year

I came across this question and I can’t wrap my head around it.

A hedge fund begins the year with \$120m and earns a 25% return for the year. The fund charges 1.5% management fee on end of year value and a 15% incentive fee on the return, net of management fees that is in excess of 6% fixed hurdle rate. The fund’s investors’ return for the year is closest to

A) 21.25%

B) 20.56%

C)19.66%

Can someone please walk me through this problem?

I will give it a shot…

Beginning value = 120,000,000

After return =150,000,000 (120,000,000*1.25)

1.5% Management fee on the end of year value (150,000,000) is 2,225,000 (150,000,000*.015).

Hard hurdle means your incentive fee is based on a return above that. So, 120,000,000*1.06 = 127,200,000. So your incentive fee is based on the difference after you deduct your management fee for the after return value. 150,000,000 - 2,225,000 - 127,200,000 = 20,575,000. 20,575,000 is what your incentive fee is based on. So, 20,575,000*.15=3,086,250. So, your incentive fee is 3,086,250. Total fees now equal your incentive fee (3,086,250) + your management fee (2,225,000) = 5,311,250. Minus that from after return value (150,000,000-5,311,250=144,688,750. (144,688,750/120,000,000) -1 = 20.57

Correct?

Thanks!! Makes so much sense now!

Friendly reminder: Learn the difference between soft and hard hurdle rate since i know that was asked at one of the mock exam (confused me).

Soft hurdle rate If the asset manager “beat” the hurdle rate they will charge you a defined percentage fee for the whole return between your initial value (Po) and ending value (P1).

Example:

• Start value = \$100; Soft Hurdle rate of 5%; ending value \$120
• The fee would be (\$120-100) * 5% = \$1

Hard hurdle rate If the asset manager “beat” the hurdle rate they will charge you a defined percentage fee for the value above the hurdle rate margin.

Example:

• Start value = \$100; Hard Hurdle rate of 5%; ending value \$120
• The fee would be (\$120-105) * 5% = \$0,75
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