Consider a hedge fund with $200 million at the start of the year. The benchmark S&P 500 index was up 16.5% during the same period. The gross return on assets is 21% and the expense ratio is 2%. For each 1% above the benchmark return the fund managers receive 0.1% incentive bonus. What was the management cost for the year?

Question

Quizplus · Accepted Answer

First, we need to calculate the return of the hedge fund, which is the gross return on assets minus the expense ratio:

Return = 21% - 2% = 19%

Next, we need to calculate the benchmark return on the $200 million:

Benchmark return = 16.5% x $200 million = $33 million

Then, we can calculate the excess return above the benchmark:

Excess return = $200 million x (19% - 16.5%) = $5.0 million

Finally, we can calculate the incentive bonus:

Incentive bonus = 0.1% x $5.0 million = $5,000

Therefore, the total management cost for the year is:

Management cost = expense ratio + incentive bonus
Management cost = 2% + $5,000
Management cost = $5,000,000

The correct answer is C.

Consider a Hedge Fund with $200 Million at the Start