If the hedge fund charges a management fee of 2%, what performance fee makes the expected fee the same as above? Ignore high water marks and ignore the fact that returns can be negative, but recall that performance fees are charged as a percentage of the (excess) return after management fees. Specifically, assume the performance fee is a fraction of the hedge funds outperformance above the risk-free interest rate

Question 5 (Hedge funds vs. mutual funds 4pt ) Consider a passive mutual fund, an active mutual fund, and a hedge fund. The mutual funds claim to deliver the following gross returns: rtpassivefundbeforefees=rtstockindex rtactivefundbeforefees=2.20%+rtstockindex+t The stock index has a volatility of var(rtstockindex)=15%. The active mutual fund has a tracking error with a mean of E(t)=0, a volatility of var(t)=3.5%, and Cov(t,rtstockindex)=0 such that it's beta to the stock index is 1 . The passive fund charges an annual fee of 0.10% and the active mutual fund charges a fee of 1.20%. The hedge fund uses the same strategy as the active mutual fund to identify "good" and "bad" stocks, but implements the strategy as a long-short hedge fund, applying 4 times leverage. The risk-free interest rate is rf=1% and the financing spread is zero (meaning that borrowing and lending rates are equal). Therefore, the hedge fund's return before fees is rthedgefundbeforefees= 1%+4(rtactivefundbeforefeesrtstockindex) Question 5 (Hedge funds vs. mutual funds 4pt ) Consider a passive mutual fund, an active mutual fund, and a hedge fund. The mutual funds claim to deliver the following gross returns: rtpassivefundbeforefees=rtstockindex rtactivefundbeforefees=2.20%+rtstockindex+t The stock index has a volatility of var(rtstockindex)=15%. The active mutual fund has a tracking error with a mean of E(t)=0, a volatility of var(t)=3.5%, and Cov(t,rtstockindex)=0 such that it's beta to the stock index is 1 . The passive fund charges an annual fee of 0.10% and the active mutual fund charges a fee of 1.20%. The hedge fund uses the same strategy as the active mutual fund to identify "good" and "bad" stocks, but implements the strategy as a long-short hedge fund, applying 4 times leverage. The risk-free interest rate is rf=1% and the financing spread is zero (meaning that borrowing and lending rates are equal). Therefore, the hedge fund's return before fees is rthedgefundbeforefees= 1%+4(rtactivefundbeforefeesrtstockindex)