A Hedge Fund Has a Capital of €100 Million and Invests

A hedge fund has a capital of €100 million and invests in a market neutral long/short strategy on the European equity market. Shares can be borrowed from a primary broker. The arrangement with the primary broker is that the hedge fund deposits as guarantee securities with an equivalent market value at time of lending, plus an additional cash margin deposit equal to 10% of the value of the shares. The primary broker keeps any interest earned on the margin and charges a fee equal to an annual rate of 0.5% of the value of the shares borrowed. The hedge fund believes that European value stocks will outperform European growth stocks. The hedge fund expects that value stocks will outperform growth stocks by 5% over the year. The hedge fund wishes to retain a cash cushion of €10 million
for unforeseen events. The short-term euro interest rate is 3%.
a. What market-neutral strategy would you suggest that would take full advantage of this scenario?
b. What is the expected return according to the funds' expectations?
c. Assume now that the European stock index appreciates by 20% over the year, but that value stocks underperform growth stocks by 10%. Compute a likely market value of the fund at year's end.