Biology Forums - Study Force

Consider a hedge fund with initial assets under management (AUM) of $1 billion; the fund will operate for a year. The manager is paid by a standard “2+20” hedge fund contract. That is, at the end of the year, he collects management fees of 2% of AUM (as of the start of the year), and if the fund’s return is above 0% (the hurdle rate), he collects 20% of that in performance fees. For instance, suppose the fund’s return turns out to be 5%, which amounts to profits of $1 billion ×5% = $50 million in dollar terms. The manager then collects $50 million ×20% = $10 million in performance fees, in addition to the $1 billion × 2% = $20 million management fees. If the fund’s return is below 0%, then the manager only collects management fees.

(a) (1 point) Please plot a graph that represents the manager’s total pay as a function of the fund’s return. Specifically, fund return should be on the horizontal axis and the manager’s total pay is on the vertical axis. Mark the axis and values as clearly as possible.