Question

Mary bought a hedge fund which charges "2 plus 25%" last year. Let the fund currently earn 35% before fees. Mary redeems her fund units now,

1. what is the total fee (in %) paid by her?  
2. how much does she earn (in %) after fees?

Answer 1

A) Return generated by the fund during the year = 35%

Management fees = 2%

Thus, hedge fund will receive 2% fees whether the fund generates profit or not.

Thus, net gain for investor after management fees = 35% - 2% = 33%

On this net gain, the hedge fund will charge 25% incentive fees

Thus, incentive fees = 25%*(35% - 2%)

= 25%*33%

= 8.25%

Thus, total fees charged by the hedge fund = Management fees + Incentive fees

= 2% + 8.25%

=10.25%

B) Mary's net profit after fees = Return generated by fund - Fees charged by the fund

= 35% - 10.25%

= 24.75%