Question

A hedge fund with a 2% management fee also charges a 30% incentive fee on amounts over a net‐of‐fees high‐water mark. The following table shows the initial investment and year‐end value received, based on the performance.

Year	Beginning	Ending
1	$1,000 million	$1,200 million
2	$1,200 million	$900 million
3	$900 million	$1,150 million
4	$1,150 million	$1,400 million
5	$1,400 million	$1,500 million

Based on the preceding data, in which of the following years will the general partner most likely earn incentive fees?

Group of answer choices

Year 1, Year 3, and Year 4.

Year 1, Year 3, Year 4, and Year 5.

Year 1, Year 4, and Year 5.

Answer 1

Year 1, Year 4, and Year 5

30% of incentive fees on amounts over a net of fees high water mark means incentive commision is paid net of closing balance and previous highest value of the fund, i.e., excess of current year balance over the previous highest value of the fund

Year	Beginning	Ending	elegible amount for incentive	eligible amount caluculation
1	$1,000 million	$1,200 million	200 million	1200-1000
2	$1,200 million	$900 million	0	900-1200
3	$900 million	$1,150 million	0	1150-1200
4	$1,150 million	$1,400 million	200 million	1400-1200
5	$1,400 million	$1,500 million	100 million	1500-1400