United Capital is a hedge fund with $250 million of initial capital. United charges a 2% management fee based on assets under management at year end, and a 20% incentive fee based on returns in excess of an 8% hurdle rate. In its first year, United appreciates 16%. Assume management fees are calculated using end-of-period valuation. The hedge fund fee assuming the performance fee is calculated net of the management fee is closest to:

 

A. 8 million

 

B. 8.64 million

 

C. 9.8 million

 

Solution: B

 

End of year capital = $250 million x 1.16 = $290 millionManagement fee = $290 million x 2% = $5.8 millionHurdle amount 8% of $250 million = $20 million;Incentive fee = ($290 - $250 - $20 - $5.8) million x 20% = $2.84 millionTotal fees to United Capital = ($5.8 + $2.84) million = $8.64 million