Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Here are data on three hedge funds. Each fund charges its investors an incentive fee of 10% of total returns. Suppose initially that a fund

Here are data on three hedge funds. Each fund charges its investors an incentive fee of 10% of total returns. Suppose initially that a fund of funds (FF) manager buys equal amounts of each of these funds, also charging its investors a 10% incentive fee. For simplicity, assume also that management fees other than incentive fees are zero for all funds.

Hedge Fund 1 Hedge Fund 2 Hedge Fund 3
Start of year value (millions) $ 130 $ 130 $ 130
Gross portfolio rate of return 15% 20% 35%

Required:

a. Compute the rate of return after incentive fees to an investor in the fund of funds.

b. Suppose that instead of buying shares in each of the three hedge funds, a stand-alone (SA) hedge fund purchases the same portfolio as the three underlying funds. The total value and composition of the SA fund is therefore identical to the one that would result from aggregating the three hedge funds. Consider an investor in the SA fund. After paying 10% incentive fees, what would be the value of the investors portfolio at the end of the year?

d. Now suppose that the return on the portfolio held by hedge fund 3 were 35% rather than +35%. Recalculate your answers to parts (a) and (b).

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Cases In Financial Reporting

Authors: Ellen Engel, D. Eric Hirst, Mary Lea McAnally

7th Edition

1934319791, 9781934319796

More Books

Students also viewed these Finance questions

Question

Is the goal of all organizations to make a profit?

Answered: 1 week ago

Question

What is a polytomous variable?

Answered: 1 week ago