High Plains Capital is a hedge fund with a portfolio valued at $475,000,000 at the beginning of the year. One year later, the value of assets under management is $541,500,000. The hedge fund charges a 1.5% management fee based on the end-of-year portfolio value as well as a 10% incentive fee. If the incentive fee and management fee are calculated independently, the effective return for a hedge fund investor is closest to:
The management fee = $541,500,000 × 0.015 = $8,122,500.
The incentive fee = ($541,500,000 － $475,000,000) × 0.10 = $6,650,000.
Total fees = $14,772,500.
Return = ($541,500,000 － $475,000,000 － $14,772,500)/$475,000,000 = 0.1089 or 10.89%.