The levels of incentive value as it will on upper side or lower side if the high water mark of a hedge fund having value of $ 62 changes from $ 66 to $ 67 . Introduction: High water mark is the mark set for the investment's highest value return. This mark is set to ascertain the performance of fund manager. Incentive fees is the amount charged by t he fund managers to achieve an excess return over the set criteria of the rate of investment.

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Chapter 26, Problem 10PS

Summary Introduction

To determine:

The levels of incentive value as it will on upper side or lower side if the high water mark of a hedge fund having value of $62 changes from $66 to $67 .

Introduction:

High water mark is the mark set for the investment's highest value return. This mark is set to ascertain the performance of fund manager.

Incentive fees is the amount charged by t he fund managers to achieve an excess return over the set criteria of the rate of investment.

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A hedge fund with net asset value of $62 per share currently has a high water mark of $66. Is the value of its incentive fee more or less than it would be if the high water mark were $67?

A hedge fund with a 1 and 15 fee structure has a hard hurdle rate of 7.45%. If the incentive fee and management fee are calculated independently and the management fee is based on beginning-of-period asset values, an investor’s net return over a period during which the grows value of the fund has increase 19.45% is closest to A. 10.85%. B. 12.65%. C. 16.65%. D. 21.74%.

A hedge fund with net asset value of $62 per share currently has a high water mark of $66. Reconsider the hedge fund. Suppose it is January 1, the standard deviation of the fund’s annual returns is 50%, and the risk-free rate is 4%. The fund has an incentive fee of 20%, but its current high water mark is $66, and net asset value is $62.a. What is the value of the annual incentive fee according to the Black-Scholes formula? (Treat the risk-free rate as a continuously compounded value to maintain consistency with the Black-Scholes formula.)b. What would the annual incentive fee be worth if the fund had no high water mark and it earned its incentive fee on its total return?c. What would the annual incentive fee be worth if the fund had no high water mark and it earned its incentive fee on its return in excess of the risk-free rate? d. Recalculate the incentive fee value for part (b) assuming that an increase in fund leverage increases volatility to 60%.