ECO-6004B The Economics of Alternative Investments
ECO-6004B The Economics of Alternative Investments
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ECO-6004B The Economics of Alternative Investments
Objectives: This seminar aims to reinforce the comprehension of the hedge fund fees compu-
tation, HWM and the market-neutral strategy.
Question 01: A Hedge Fund has a 1.5 and 20 fee arrangement and no hurdle rate. The net asset
value (NAV) at the start of the year is $300 million and NAV at year end (before fees) is $385
million. Assume that management fees are computed on start-of-year NAV and are distributed
annually and there are no redemptions or subscriptions.
Calculate the annual management fee, incentive fee and the ending NAV after fees.
Question 02: Given the following information about hedge fund fee arrangement and NAV at
the start of the year and at NAV at the end of the year before fees.
Beginning Ending NAV Management Fee Incentive Fee Ending NAV
NAV ($ Mil.) before fees ($ Mil.) % $ % $ after fees ($ Mil.)
200.00 250.00 2.00 20.00
300.00 400.00 1.50 20.00
250.00 450.00 1.50 15.00
100.00 250.00 2.00 30.00
100.00 101.00 1.00 20.00
100.00 105.00 2.00 15.00
Assuming that management fees are computed on start of year NAVs, work out the manage-
ment fees, incentive fees and ending NAV after fees.
*University of East Anglia
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Question 03: Given the following information about a hedge fund fees arrangement and NAV
at the start of the year and at NAV at the end of the year after fees.
Beginning Ending NAV Management Fee Incentive Fee Ending NAV
NAV ($ Mil.) before fees ($ Mil.) % $ % $ after fees ($ Mil.)
100.00 2.00 20.00 300.00
150.00 1.50 25.00 450.00
200.00 3.00 15.00 500.00
50.00 2.00 20.00 150.00
75.00 1.50 15.00 200.00
100.00 1.00 15.00 250.00
Assuming that management fees are computed on start of year NAVs, work out the manage-
ment fees, incentive fees and ending NAVs before fees.
Question 04: The following is part of the regression output of monthly returns on Waterworks
stock against the S&P 500 index. A hedge fund manager believes that Waterworks is under-
priced, with an alpha of 2% over the coming month.
Beta R2 Std. Dev. of Residuals
0.75 0.65 0.06 (i.e. 6% monthly)
If the fund manager holds a $3.36 mil. portfolio of Waterworks stock, and wishes to hedge
market exposure for the next month using 1-month maturity S&P 500 futures contracts. The
S&P 500 futures is currently priced $2,016.00. She also knows that the contract multiplier is 250.
Please address the following questions:
a) Assuming she wants to pursue a market-neutral strategy, how many contracts should the
manager enter? Should he buy or sell contracts?
b) What is the standard deviation of the monthly return of the hedged portfolio?
Question 05: A hedge fund has a 2 and 20 fee arrangement and no hurdle rate. Fees are paid
annually subject to an HWM provision. Each time the annual NAV makes a new high at the
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end of a period, incentive fees are paid, and a new HWM is set. Assume that the NAV at the
start of the year is $100 million, and gross return (in % of the beginning NAV) data are provided
in the worksheet Question 05 of the excel file ECO-6004B Workshop 07 – Data.
Calculate management fees, incentive fees and ending NAV after fees.