Hedge Fund Arithmetic

My friend Investo, who runs money for an institutional investor, has cooked up a wonderful get-acquainted example for those who want to make friends with a hedge fund. Investo poses the case of an investor who plunks down $100 (million), with a commitment to pay 20 percent of the gross to the manager (we'll skip management fees, heh heh). Anyway, the fund enjoys 20 percent returns in each of five years; then in the sixth year (sound familiar?) it loses 60 percent. What is the net return to (a) the investor and (b) the manager? The answers are: for the invetor, a $16 million loss; for the manager, a $27.5 million gain. Here are the details:

Parsing: The first column starts with the $100 mill. As we move down, we get the new years' investment less the commission plus 20 percent. The next column is the commission. At the end, we total up the commissions, which the investor pockets. The investor's net is his final position less a grubstake.

Investo also worked out a variant where the manager eats his own cooking, aka invests in his own fund. He still winds up ahead albeit less dramatically, with only $15.52 million instead of $27.51, and as the New York Times did not say, you try living on the Upper East Side for $15.52 million. The investor is skunked as before.

If this does nolt strike you as an outrage, then there is a hedge fund somewhere that might consider you as a candidate for employment.

Geek Footnote: Why can't I lop that extra white space off the bottom of my chart? And what happened to my footnotes?