A portfolio manager’s hypothetical fee agreement
Series X-A case study · set 2, case 6 of 9 · 5 questions · 1 mark each
Question 1 of 5Case practice
0 right · 0 wrong · 5 to go
The case · stays here for all 5 questions
A client starts a year with ₹100 lakh in a managed account. There are no external cash flows. The agreement charges a fixed annual fee of 1% of the opening value. It then charges 20% of positive performance above a ₹108 lakh high-water mark, using the account value after the fixed fee. No performance fee is charged when that value is at or below the mark. The gross year-end account value is ₹115 lakh before either fee. For comparison, also consider an alternative gross outcome of ₹106 lakh. The contract terms are hypothetical and there are no taxes, other costs or hurdle-rate adjustments.
All people, firms, prices and contract terms are fictional.
Ignore taxes and transaction costs unless the case explicitly includes them.
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The case and its answers
Every question of this case, with its answer and why each other option is wrong.
A client starts a year with ₹100 lakh in a managed account. There are no external cash flows. The agreement charges a fixed annual fee of 1% of the opening value. It then charges 20% of positive performance above a ₹108 lakh high-water mark, using the account value after the fixed fee. No performance fee is charged when that value is at or below the mark. The gross year-end account value is ₹115 lakh before either fee. For comparison, also consider an alternative gross outcome of ₹106 lakh. The contract terms are hypothetical and there are no taxes, other costs or hurdle-rate adjustments.
All people, firms, prices and contract terms are fictional.
Ignore taxes and transaction costs unless the case explicitly includes them.
Q1What is the fixed fee for the year?
Option A. ₹0.20 lakh
Why it is wrong: This uses the performance-fee percentage incorrectly.
Option B. ₹7 lakh
Why it is wrong: This is the gross amount over the high-water mark.
Option C. ₹1 lakh — Correct answer
Option D. ₹1.15 lakh
Why it is wrong: This applies the rate to the gross closing value, contrary to the agreement.
Answer: C. 1% × ₹100 lakh = ₹1 lakh. Remember: Fee calculations must follow the contract’s stated base.
Hint, shown before you answer in practice mode: The agreement uses the opening value.
XA-S2-C06-Q1easynumerical
Q2At the ₹115 lakh gross outcome, what value is tested against the high-water mark?
Option A. ₹113.80 lakh
Why it is wrong: This deducts a performance fee before calculating it.
Option B. ₹114 lakh — Correct answer
Option C. ₹108 lakh
Why it is wrong: This is the threshold, not the value being tested.
Option D. ₹115 lakh
Why it is wrong: This omits the fixed fee that must be deducted first.
Answer: B. ₹115 lakh − ₹1 lakh = ₹114 lakh. Remember: The order of fee calculations can change the resulting charge.
Hint, shown before you answer in practice mode: Apply the fixed fee before the performance test.
XA-S2-C06-Q2mediumnumerical
Q3What performance fee is payable at that outcome?
Option A. ₹1.20 lakh — Correct answer
Option B. ₹1.40 lakh
Why it is wrong: This charges on gross value before the fixed fee.
Option C. ₹6 lakh
Why it is wrong: This is the chargeable excess before applying the 20% rate.
Option D. ₹3 lakh
Why it is wrong: This charges on the whole gross gain from ₹100 lakh.
Answer: A. 20% × (₹114 lakh − ₹108 lakh) = ₹1.20 lakh. Remember: A high-water-mark fee applies to the specified excess, not every rupee of return.
Hint, shown before you answer in practice mode: Apply 20% only to the positive excess above ₹108 lakh after the fixed fee.
XA-S2-C06-Q3mediumnumerical
Q4What final account value remains after both fees?
Option A. ₹112.80 lakh — Correct answer
Option B. ₹113.60 lakh
Why it is wrong: This uses an inconsistent performance-fee base.
Option C. ₹114 lakh
Why it is wrong: This deducts only the fixed fee.
Option D. ₹108 lakh
Why it is wrong: The high-water mark is not a cap on the client’s value.
Answer: A. ₹115 lakh − ₹1 lakh − ₹1.20 lakh = ₹112.80 lakh. Remember: Net account value reflects every applicable fee in the prescribed sequence.
Hint, shown before you answer in practice mode: Subtract both calculated charges from the gross account value.
XA-S2-C06-Q4mediumnumerical
Q5At the alternative ₹106 lakh gross outcome, what performance fee is payable?
Option A. ₹0 — Correct answer
Option B. ₹1 lakh
Why it is wrong: This is the fixed fee, which is a separate charge.
Option C. ₹1.60 lakh
Why it is wrong: This incorrectly charges the amount below the high-water mark.
Option D. ₹1.20 lakh
Why it is wrong: This is the fee for the ₹115 lakh alternative.
Answer: A. ₹106 lakh − ₹1 lakh = ₹105 lakh, below ₹108 lakh. The positive excess is zero, so the performance fee is zero. Remember: A recovery below the contractual high-water mark need not trigger a performance fee.
Hint, shown before you answer in practice mode: After the fixed fee, compare ₹105 lakh with ₹108 lakh.
XA-S2-C06-Q5mediumnumerical
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