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Jupiter Fund of Funds invests $250 million in each of two funds, Venus Hedge Fund and Mars Hedge Fund. Jupiter has a “2 and 10” fee structure. Both hedge funds charge a 2% management fee based on assets under management at the end of the year and a 20% incentive fee, which is calculated net of management fee. After one year, Jupiter’s investments in Venus and Mars are valued at $230 million and $320 million respectively, after accounting for their respective management and incentive fees. The annual return to an investor in Jupiter, net of fees, at the fund of funds level is closest to:

A 6.80%.

End of year capital = $230m + $320m = $550 million
Management fee = $550m x 2% = $11 million
Incentive fee = ($550m − $500m) x10% = $5 million
Total fees = $11m + $5m = $16 million
Investor’s net return = ($550m − $500m − $16m) / $500m = 6.8%

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