Question

For example, imagine a hedge fund managing $200 million with a 2% management fee and a 20% performance fee benchmarked to the S&P 500 total return. If the fund earns a 12% return in a year when then S&P 500 total return was 7%, what is the after-fee return for investors? How much does the fund make in fees (dollar amount)?

Answer 1

Generally, Hedge funds charge a fixed percentage (here it is 2%)  on the total assets under manageent as their management fee (irrespective of their performance) plus a performance fee (here 20%) on the profits/return generated over and above the benchmark return ( S & P 500 total return of 7%)

As the Hedge fund is managiing Assets of $200 million and generating a return of 12% on the same in a year

The total profit generated = $ 200 million * 12% = $24 million

Therefore , Assets under Management at the end of the year = $ 224 million

However, as the benchmarked return is 7%, the profit/return generated above this benchmark is 5%. (12%-7%)

Therefore total  return over and above the benchmark return is = $200 million * 5% = $ 10 million

Now, the total management fee of 2% is charged generally on Year End assets

Therefore, Management fee= 2% of $224 million = $4.48 million

and Performance Fee = 20% on return above benchmark = 20% of $10 million = $ 2 million

Therefore, the fund makes a total of $4.48 million + $ 2 million = $ 6.48 million in management fees

And the net return left for the investors is = $24 million- $ 6.48 million = $ 17.52 million

which translates to an after fee return = 17.52/ 200 = 8.76% for Investors