FRM L1 Book 3 Chapter 3

Sure, I will start with 3.11 today and add subsequently

3.11 The fees of a hedge fund are 2% plus 20%. What is the investor’s return as an algebraic function of the asset
return

Sure, I will start with 3.11 today and add subsequently

3.11 The fees of a hedge fund are 2% plus 20%. What is the investor’s return as an algebraic function of the asset
return generated by the hedge fund? Consider all possible values of the fund’s return. Assume that the incentive fee
is applied after the management fee has been subtracted and that the management fee is applied to the beginning
of-year assets under management.

My Explanation

IF return is greater than 2%, In this case the return will be 80% to the investors on net of management fee (2%) returns. The 20% goes to the fund manager.

so, if Return is greater than 2% (Mgmt Fee) then Return to Investor is 80% * (R-2%) = 0.8*R -0.02

On the Other hand if Return is less than 2% then there will be no incentive fee as net off fee return will be neagtive, so the return function will  R – 2%  or in Decimals R-0.02

Hope this helps.