Financial Models


 

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Hedge Fund Returns


A monte-carlo simulation based financial model to test the impact of leverage.

Say you are able to get a loan of a million dollars. With this you go to the neighborhood hedge fund and have them invest it for you. The hedge fund boys will typically do a 2/20 deal i.e., they take an annual fee of 2% of the amount that you have given them and a 20% cut of the profit that they make for you.

You can use the parameters below to model this. The key item to specify are the expected return that the hedge fund is promising and its standard deviation. Rest of the items have default values that you can change as you wish.

What is this standard deviation? There is a good chance that your actual return will vary from the average return that you specified. With the standard deviation value, we can run model the realistic scenario where the annual return is randomly generated assuming a normal distribution with the mean (i.e., the expected return) and standard deviation as specified in the table below.


Expected return per year (%) % Std Dev of return (%) %
Investment horizon years Investment amount $
Interest rate on loan (% pa) % Hedge fund fees (% of invested amount, pa) %
Hedge fund cut of profit % Model iterations



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