Hedge Fund Investing: A Practical Approach to Understanding Investor Motivation, Manager Profits, and Fund Performance

Discussion Questions and Problems

1. bWhat would be the annual fees paid to the hedge fund sector, assuming compression for the standard 2 percent management fee and 20 percent performance fee to a reduced 1.5 percent management fee and 15 percent performance fee and an expansion of assets from $2 trillion to $3 trillion given the following gross performance?

a. −5 percent

b. 0 percent

c. 5 percent

d. 10 percent

e. 20 percent

2. What is the break-even amount of assets that a $50 million hedge fund manager needs to generate in year 1, assuming $5 million in operating expenses and other fund charges and a standard 2 percent and 20 percent fee arrangement at each of the following gross performance levels?

a. –5 percent

b. 0 percent

c. 5 percent

d. 10 percent

e. 20 percent

3. What if the same fund only had a 1 percent and 15 percent compensation arrangement and generated the following returns?

a. –5 percent

b. 0 percent

c. 5 percent

d. 10 percent

e. 20 percent

4. What will be the value of the industry's equity commissions paid to Wall Street firms, assuming the industry equity strategies reach $1.5 trillion, use two times leverage, turn over the portfolios twice a year, and pay 10 b.p. in commission? How does the answer change if commission rates fall to one basis point, turnover increases to four times per year, and leverage grows to four times?

5. What would be the financing revenue paid to Wall Street, assuming the equity-oriented funds using traditional ...