Mr Dowdy Invests $2 Million in a Hedge Fund with a 2/20

question 16

Multiple Choice

Mr. Dowdy invests $2 million in a hedge fund with a 2/20 fee structure. The fund has a total of $33 million of assets under management and the return in the first year is 23%. Assume that management fees are paid at the beginning of each year and performance fees are paid at the end of each year in which they are applicable. What is the amount of the performance fee that Mr. Dowdy will pay in the first year?

• A)$40,000
• B)$82,160
• C)$90,160
• D)$400,000
• E)$410,800

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Definitions:

Willingness to Pay

The maximum amount a consumer is ready to spend for a good or service.

Surplus

The situation where the quantity supplied of a product exceeds the quantity demanded at a given price.

Negative Externality

An economic situation where a third party is negatively affected by the actions of others, typically not reflected in the cost of those actions, such as pollution.

Common-Resource Problem

A dilemma in the management of resources that are available to all but are susceptible to overuse and depletion because they are not excludable.