XYZ Plan, a hedge fund currently has assets of 40 crore. Mr. A, the manager of fund charges fee of 0.10% of portfolio asset. In addition to it he…

CA Final · Advanced Financial Management · MTP · May 2024
XYZ Plan, a hedge fund currently has assets of 40 crore. Mr. A, the manager of fund charges fee of 0.10% of portfolio asset. In addition to it he charges an incentive fee of 2%. The incentive will be linked to gross return each year in excess of the portfolio maximum value since the inception of fund. The maximum value the fund achieved so far since inception of fund about one and half year ago was 42 crores. Evaluate: (i) Benchmark Return to make Mr. A eligible for incentive fee. (ii) The fee payable to Mr. A if return on the fund this year turns out to be: (1) 29% (2) 4.5%

Suggested Answer and Working Notes:

(i) Benchmark Return = (42 crore - 40 crore) / 40 crore x 100% = 5% (ii) (1) If return is 29% Particulars ₹ Fixed fee (A) 0.10% of 40crore 4,00,000 New Fund Value (1.29 x 40 crore) 51.60 crore Excess Value of best achieved (51.60 crore - 42.00 crore) 9.60 crore Incentive Fee (2% of 9.60 crores) (B) 19,20,000 Total Fee (A)+(B) 23,20,000 (2) If return is 4.5% Particulars ₹ Fixed (A) 0.10% of 40crore 4,00,000 New Fund Value (1.045 x 40 crore) 41.80 crore Excess Value of best achieved (41.80 crore - 42.00 crore) (₹ 0.20 crore) Incentive Fee (as does not exceed best achieved) (B) Nil Total Fee (A)+(B) 4,00,000

Topics: Mutual Fund

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