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. Using the management cost calculated, what was the annual return on this fund?

Question

Quizplus · Accepted Answer

First, we need to calculate the management cost: 
Expense Ratio = 2% 
Management cost = (Expense Ratio/100) x Assets Under Management 
= (2/100) x 200 million 
= 4 million

Next, we need to calculate the excess return: 
Excess return = Gross return on assets - Benchmark return 
= 21% - 16.5% 
= 4.5%

Now we can calculate the incentive bonus: 
Incentive bonus = (Excess return / 1) x (0.1/1) 
= 0.045 x 0.1 
= 0.0045 or 0.45%

Finally, we can calculate the net return: 
Net return = Gross return on assets - Management cost + Incentive bonus 
= 21% - 4 million + 0.45% 
= 18.55%

Therefore, the annual return on this fund is 18.55%.

Consider a Hedge Fund with $200 Million at the Start