DHANAM PRELIMINARY ROUND

FINANCE CLUB

By
SANSRITI 2027241

OMKAR ESHWAR 2027033

MBA PROGRAMME
SCHOOL OF BUSINESS AND MANAGEMENT
CHRIST (DEEMED TO BE UNIVERSITY), BANGALORE

JULY 2021

Answer 1 -
1. If I was a hedge fund manager considering these 2-dividend paying energy mutual
Funds Investing Vanguard Energy Fund Investor Shares (VGENX) have a major
scope for investors because
 The investment team at (VGENX), uses a bottom-up approach, in which
stocks are chosen based on the advisor’s estimates of fundamental investment
value.
 It always focuses on long term capital appreciation
 It was one of the low-cost index fund offers exposure to the energy sector of
the U.S. equity market, which includes stocks of companies involved in the
exploration and production of energy products such as oil, and natural gas.
 Particularly in this mutual fund there is no-load mutual fund, you pay one
expense ratio instead of racking up the commissions you'd pay when buying
and selling individual securities yourself.
 Considering it has a has a neutral Zacks Mutual Fund rank, and in conjunction
with its comparatively strong performance, average downside risk, and lower
fees, this fund looks like a good choice for investors right now.
Answer 2 -

The so-called 2-and-20 fee structure is the most common fee structure in the hedge fund
business, in which a fund charges an annual management fee of 2% of assets under
management and a performance incentive fee of 20% of any profits. However, in the example
above, the asset management charge is 1%, and the incentive fee is 20% of the profits.
If any past losses have been recovered, the incentive fee will not be paid, assuming the
presence of a high-water mark. In addition, a 10% hurdle rate and a total 20% profit incentive
fee applied to the fund manager begin at $12. The fundamental difference between hedge
funds and mutual funds fee structures is that hedge funds are more actively managed than
mutual funds, and this performance fee is added to compensate for the fund managers' extra
efforts.

Hedge fund managers are authorized to use short selling, leverage, derivatives, short sales,
options, and futures contracts, giving them more freedom than mutual fund managers. In
addition, the incentive fees motivate experienced managers to provide strong returns to
clients. In addition, incentive fees give managers with robust incentive schemes, according to
research: the larger the incentive fee, the better the fund performance.

It is critical to emphasize that this charge structure will assist in increasing revenues. In the
example above, the fee structure aids investors in achieving their objectives by comparing the
fund manager's profits to the fund's profits. It's also evident that the managers' risk is high, as
they could lose money.

If the high-water mark is not there, the managers profit is from the upside but do not suffer
from the fall, which does not lead to goal failure. However, in the situation of big losses,
target achievement will be out since the fund management can stop the existing fund and
create another fund because of the high-water mark which precludes the manager from
gaining the incentive fees in the future periods. Managers have incentives to enhance the
value of the portfolio and take greater risks near the end of an evaluation period because the
asset worth of the fund is not far below the high-water mark for receiving performance fees.
Because of the volatility in the energy business, high water usage is an unjust source of
reward for an energy hedge fund's investment manager. When fund managers are
compensated based on earnings, they are less likely to merely expand portfolio and asset
management to increase incentive fees. To see if the fee structure is beneficial to investors,
we examine the hedge funds' returns over time to measure their performance.

Answer 3-

The construction of Hedge fund investments charges is definitively imperfect. These flaws
are extraordinary to the point that institutional financial backers will drive considerable
change throughout the next few years. The issue emerges when the premise on which charges
are determined serves to break the necessary clean association among worth and cost.
Shockingly, the design of speculative stock investments charges when superimposed on how
funds’ portfolios are overseen brings about a huge breakdown between the worth got and the
cost paid. Also, this disappointment has in enormous measure stayed lethargic because of the
unusually low returns created by customary resource categories. However, in the long run,
routineness will return, and values, credit, and products will by and by create their
conventional returns, and around then, flexible investments customers will revolt –
demanding a reconfiguration of the mutual funds charge structure. This article investigates
the nature and seriousness of this issue. Some investors consider the hedge fund fee structure
excessively high. Nonetheless, the industry has generally maintained this compensation
structure over the years. It is able to do so primarily because hedge funds have consistently
been able to generate high returns for their investors. Therefore, clients have been willing to
put up with the fees, even if they consider them somewhat exorbitant, in order to obtain very
favorable returns on investment

The hedge fund compensation structure consisting of a management fee and a performance
fee. Management fee which is applied to the total assets under management. A performance
fee is charged on the profits that the hedge fund generates, beyond a specified minimum
threshold.

The % of a management fee which is applied to the total assets under management. A
performance fee is charged on the profits that the hedge fund generates, beyond a specified
minimum threshold.