Assume that you have invested $500,000 to purchase shares in a hedge fund reporting $800 million in assets, $100 million in liabilities, and 70 million shares outstanding. Your initial lockout period is 3 years.
-What is your annualized return over the 3-year holding period?

Question

Quizplus · Accepted Answer

To calculate the annualized return, follow these steps:

Step 1: Calculate the net asset value (NAV) of the hedge fund

NAV = (Assets - Liabilities) / Shares Outstanding 
NAV = ($800,000,000 - $100,000,000) / 70,000,000 
NAV = $10.00

Step 2: Calculate the ending value of the investment

Ending Value = Initial Investment * (1 + Return)^Number of Years 
Since the lockout period is 3 years, the total holding period is also 3 years. 
We need to solve for the Return that will give us the ending value based on the NAV: 
$500,000 * (1 + Return)^3 = Ending Value 
Ending Value = Shares Owned * NAV 
Ending Value = 500,000 / 10 = 50,000 
$500,000 * (1 + Return)^3 = 50,000 
1 + Return = (50,000 / 500,000)^(1/3) 
1 + Return = 0.87055 
Return = -0.12945 or -12.95%

Step 3: Calculate the annualized return

Annualized Return = [(1 + Return)^(1 / Number of Years)] - 1 
Annualized Return = [(1 - 0.12945)^(1 / 3)] - 1 
Annualized Return = 0.04796 or 4.796%

Therefore, the annualized return over the 3-year holding period is 15.18%.

Assume That You Have Invested $500,000 to Purchase Shares in a Hedge