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**CFA Practice Question**

A hedge fund charges a base fee of 1.5% and an incentive fee of 15% on returns in excess of the risk-free rate. If the fund's gross return is 8%, and the risk-free rate is 2.5%, the net return to the investor is:

A. 4.65%

B. 5.32%

C. 5.68%

**Explanation:**Total fees expressed as a percentage equal:

Fees (%) = 1.5% + 0.15 (8% - 2.5%) = 2.325%

Net return = 8% - 2.325% = 5.675%, or 5.68%

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**User Contributed Comments**
6

User |
Comment |
---|---|

Nakata |
Isn't it 0.015*108+the performance fee? |

drods91 |
Same thought here. I calculated the management fee as 108*0.015 = 1.62 |

praj24 |
Nah incentive fee is based on anything above the risk free rate. .15 x .055 |

stefanie13 |
yes! I thought 1.5% is charged based on the ending balance of the fund! |

ascruggs92 |
^agreed. My issue with this explanation is that the text says to calculate the base fee on the end balance of the fund, so the total fee charged would be: (108) 1.5% + 0.15 (8% - 2.5%) (100) Their explanation simply adds the two percentages together, but based on what the notes say, you can't do that because the percentages aren't being multiplied by the same base amount. Either way, most CFA questions on the website are worded "the net return to the investor is closest to..." I got 8-2.445= 5.555%. Round that up to 5.6% and C is still the answer |

Chl4072 |
Total fee=base rate + incentive fees (gross return -risk-free rate) 1.5%+15% (8%-2.5%)= 0.015+0.15 (0.08-0.025)= 0.015+0.15 (0.055)= 0.015+0.00825= 0.02325/100= 2.325% Net return=gross retuning - total fee expressed 8%-2.325%=5.675%/ 5.68% Finally got the answer...I was so confused. |