Question

Suppose money invested in a hedge fund earns 1% per trading day. There are 250 trading days per year. What will be your annual return on $100 invested in the fund if the manager allows you to reinvest in the fund the 1% you earn each day?

Answer 1

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F = P 1 + r n n where n is the number of compounding periods per year and hence r/n is the rate per compounding period.

We are given r/n = 1% per day and are asked to calculate the annual yield.

This is equivalent to asking for the effective annual rate.

EAR = (1 + .01)250 − 1 = 11.0321

Multiplying by 100 puts this into percentage terms: 1103.21% per annum.

Looked at another way, investing $100 in the hedge fund produces

$100(1 + .01)250

= $1203.21 at the end of one year.