Alternative Investment Questions CFA

AWJ Capital is a hedge fund with $100 million of initial investment capital. They charge a 2 percent management fee based on assets under management at year- end and a 20 percent incentive fee. In its first year, AWJ Capital has a 30 percent return. Assume management fees are calculated using end-of-period valuation.

"What are the fees earned by AWJ if the incentive and management fees are calculated independently? What is an investor’s effective return given this fee Structure?"

AWJ Capital is a hedge fund with $100 million of initial investment capital. They charge a 2 percent management fee based on assets under management at year- end and a 20 percent incentive fee. In its first year, AWJ Capital has a 30 percent return. Assume management fees are calculated using end-of-period valuation.

"What are the fees earned by AWJ assuming that the incentive fee is calculated based on return net of the management fee? What is an investor’s net return given this fee structure?"

AWJ Capital is a hedge fund with $100 million of initial investment capital. They charge a 2 percent management fee based on assets under management at year- end and a 20 percent incentive fee. In its first year, AWJ Capital has a 30 percent return. Assume management fees are calculated using end-of-period valuation.

"If the fee structure specifies a hurdle rate of 5 percent and the incentive fee is based on returns in excess of the hurdle rate, what are the fees earned by AWJ assuming the performance fee is calculated net of the management fee? What is an investor’s net return given this fee structure?
In the second year, the fund value declines to $110 million."

AWJ Capital is a hedge fund with $100 million of initial investment capital. They charge a 2 percent management fee based on assets under management at year- end and a 20 percent incentive fee. In its first year, AWJ Capital has a 30 percent return. Assume management fees are calculated using end-of-period valuation.

"The fee structure is as specified for question 1 but also includes the use of a high water mark. What are the fees earned by AWJ in the second year? What is an investor’s net return for the second year given this fee structure?
In the third year, the fund value increases to $128 million."

"AWJ Capital is a hedge fund with $100 million of initial investment capital. They charge a 2 percent management fee based on assets under management at year- end and a 20 percent incentive fee. In its first year, AWJ Capital has a 30 percent return. Assume management fees are calculated using end-of-period valuation."

The fee structure is as specified in questions 1 and 4. What are the fees earned by AWJ in the third year? What is an investor’s net return for the third year given this fee structure?"

"AWJ Capital is a hedge fund with $100 million of initial investment capital. They charge a 2 percent management fee based on assets under management at year- end and a 20 percent incentive fee. In its first year, AWJ Capital has a 30 percent return. Assume management fees are calculated using end-of-period valuation."

What are the arithmetic and geometric mean annual returns over the three-year period based on the fee structure specified in questions 1, 4, and 5? What is the capital gain to the investor over the three-year period? What are the total fees paid to AWJ over the three-year period?"

"An investor is contemplating investing €100 million in either the ABC Hedge Fund (ABC HF) or the XYZ Fund of Funds (XYZ FOF). XYZ FOF has a “1 and 10” fee structure and invests 10 percent of its assets under management in ABC HF. ABC HF has a standard “2 and 20” fee structure with no hurdle rate. Management fees are calculated on an annual basis on assets under management at the beginning of the year. Management fees and incentive fees are calculated independently. ABC HF has a 20 percent return for the year before management and incentive fees."

"1. Calculate the return to the investor of investing directly in ABC HF."

"An investor is contemplating investing €100 million in either the ABC Hedge Fund (ABC HF) or the XYZ Fund of Funds (XYZ FOF). XYZ FOF has a “1 and 10” fee structure and invests 10 percent of its assets under management in ABC HF. ABC HF has a standard “2 and 20” fee structure with no hurdle rate. Management fees are calculated on an annual basis on assets under management at the beginning of the year. Management fees and incentive fees are calculated independently. ABC HF has a 20 percent return for the year before management and incentive fees."

"Calculate the return to the investor of investing in XYZ FOF. Assume that the other investments in the XYZ FOF portfolio generate the same return before management fees as ABC HF and have the same fee structure as ABC HF."

"An investor is contemplating investing €100 million in either the ABC Hedge Fund (ABC HF) or the XYZ Fund of Funds (XYZ FOF). XYZ FOF has a “1 and 10” fee structure and invests 10 percent of its assets under management in ABC HF. ABC HF has a standard “2 and 20” fee structure with no hurdle rate. Management fees are calculated on an annual basis on assets under management at the beginning of the year. Management fees and incentive fees are calculated independently. ABC HF has a 20 percent return for the year before management and incentive fees."

"3. Why would the investor choose to invest in an FOF instead of an HF given the effect of the “double fee” as demonstrated in the answers to questions 1 and 2"