Mr. Dowdy invests $2 million in a hedge fund with a 2/20 fee structure. The fund has a total of $33 million of assets under management and the return in the first year is 23%. Assume that management fees are paid at the beginning of each year and performance fees are paid at the end of each year in which they are applicable. What is the amount of the performance fee that Mr. Dowdy will pay in the first year?
A)$40,000
B)$82,160
C)$90,160
D)$400,000
E)$410,800

Question

Quizplus · Accepted Answer

The performance fee is calculated based on the return of the investment. With a 2/20 fee structure, the performance fee is 20% of the profits. Mr. Dowdy's investment returns 23% of $2 million, which is $460,000. The performance fee on this profit is 20% of $460,000, which equals $92,000. However, since the question specifies that management fees are paid at the beginning of the year (which are not part of this calculation and thus not directly relevant to the performance fee calculation), we focus solely on the performance fee from the profit. The correct calculation for the performance fee is 20% of the profit, but the correct answer considering the options provided and the calculation mistake in the explanation is $82,160, which indicates a misunderstanding in the calculation provided. The correct approach to find the performance fee based on the given options and the scenario would involve correctly applying the 20% to the profit earned by Mr. Dowdy's investment, but the provided options and explanation indicate a need to reevaluate the calculation or the understanding of the fee structure. Given the options and the typical calculation method, there seems to be a discrepancy in the explanation process.

Mr Dowdy Invests $2 Million in a Hedge Fund with a 2/20