Question #38 - Reading 34 Hedge Fund Strategies

Reading: Reading 34 Hedge Fund Strategies

PDF File: Reading 34 Hedge Fund Strategies.pdf

Page: 16

Status: Incorrect

Correct Answer: A

Your Answer: B

Shared Context

- Considering all the short-term objectives specified in the recent investment committee motion, which of the following style allocation recommendations for CAM is most likely to be appropriate? A) Rotate from relative value strategies into equity strategies. B) Rotate from equity strategies into opportunistic strategies. C) Rotate from equity strategies into distressed securities funds.

Question

Based on the fee structure information provided, if CAM allocates equally to two managers —one of which makes a gross return of 8%, while the other manager realizes a gross return of –8%—the net return to CAM investors is closest to:

Answer Choices:

A. 0.0%

B. -1.5%

C. -3.1%

Explanation

Management fee for the profitable manager = 1.5% Incentive fee for the profitable manager = 0.175 × (8% – 1.5%) = 1.1375% Net return from profitable manager = 8% – 1.5% – 1.1375% = 5.3625% Management fee for the loss-making manager = 1.5% Incentive fee for the loss-making manager = 0% Net return from profitable manager = –8% – 1.5%= –9.5% Hence, the gross return to CAM investors = (0.5 × 5.3625%) + (0.5 × –9.5%) = –2.06875% Management fee payable by CAM investors = 1% Incentive fee payable by CAM investors = 0% So, the gross return earned by CAM investors = –2.06875% – 1% = –3.06875%

Actions

Practice Flashcards