Consider a hedge fund with initial assets under management (AUM) of $1 billion; the fund will operate for a year. The manager is paid by a standard 2+20 hedge fund contract. That is, at the end of the year, he collects management fees of 2% of AUM (as of the start of the year), and if the funds return is above 0% (the hurdle rate), he collects 20% of that in performance fees. For instance, suppose the funds return turns out to be 5%, which amounts to profits of $1 billion 5% = $50 million in dollar terms. The manager then collects $50 million 20% = $10 million in performance fees, in addition to the $1 billion 2% = $20 million management fees. If the funds return is below 0%, then the manager only collects management fees.

QUESTION

Please plot a graph that represents the managers total pay as a function of the funds return. Specifically, fund return should be on the horizontal axis and the managers total pay is on the vertical axis.2 Mark the axis and values as clearly as possible.