You invested $1,250,000 with a market-neutral hedge fund manager. The fee structure is 2/20, and the fund has a high-water-mark provision.
Suppose the first year the fund manager loses 7 percent, and the second year she gains 21 percent.
Assume management fees are paid at the beginning of each year and performance fees are taken at the end of each year.
What is the fee to run the fund for year 1? What is the fee to run the fund for year 2?
What is the performance fee-if any, for year #2?
Please show work.