Richard invested $750,000 in a hedge fund with a 2/20 fee structure. The fund had a total of $15 million of assets under management and it returned 12% and 19% in the first and second years, respectively. 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. How much will Richard pay in performance fees for the first two years, respectively?

Question

Quizplus · Accepted Answer

First, we need to calculate the management fees for the first two years:

Year 1 management fee = $750,000 x 2% = $15,000
Year 2 management fee = ($750,000 + $15,000) x 2% = $15,300

Next, we need to calculate the performance fees for the first two years. Since the fund returned 12% in the first year, the performance fee is calculated as:

Year 1 performance fee = ($750,000 + $15,000) x (12% - 2%) x 20% = $14,640

Since the fund returned 19% in the second year, the performance fee is calculated as:

Year 2 performance fee = ($750,000 + $15,000 + $14,640) x (19% - 2%) x 20% = $26,877

Therefore, Richard will pay $14,640 in performance fees for the first year and $26,877 for the second year. The answer is C.

Richard Invested $750,000 in a Hedge Fund with a 2/20