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

The fund's gross return on assets is 21%, but after deducting the expense ratio, the net return on assets is 19%. The benchmark was up 16.5%, so the fund outperformed the benchmark by 2.5%.

Management fee = $200 million * 2% = $4 million
Incentive bonus = 0.1% * 2.5% * $200 million = $500,000

Therefore, total management cost = management fee + incentive bonus = $4,500,000

Hence, the best choice is C, $5,929,000 is incorrect because it is too high, B $4,900,000 is incorrect because it only considers management fee but not the incentive bonus, and D $6,446,000 is incorrect because it overestimates the total management cost.

Consider a Hedge Fund with $200 Million at the Start