Case study: reviewing a fund's terms and monthly report

All organizations and figures in this case are fictional and illustrative. They are chosen to keep the arithmetic simple, not to describe any real fund or market.

The situation

The Ridgemont University Endowment, a fictional US endowment, invested $20 million in the Kessling Harbor Equity Long/Short Fund when it launched three years ago, buying 200,000 Class A shares at $100.00 each. As a US tax-exempt investor, it holds its shares through the fund's offshore feeder. Because it subscribed at launch, the fund's high-water mark applies to all of its shares.

It is now early January of year 4. Ridgemont's new hedge fund analyst has been handed the fund's key terms and the December monthly report from Kessling Harbor Capital, and has been asked to brief the endowment's investment committee before it decides whether to keep, add to or reduce the holding. Read the two summaries below, then answer the questions.

Kessling Harbor Equity Long/Short Fund: key terms summary (illustrative)

Term	Summary
Investment manager	Kessling Harbor Capital
Strategy	Equity long/short in large listed companies, with shares that trade daily
Structure	Master-feeder: an onshore feeder (a US limited partnership) for US taxable investors and an offshore feeder (a company) for non-US and US tax-exempt investors, both investing in a single master fund that holds the portfolio
Share class	Class A, US dollars, in the offshore feeder
Management fee	1.5% a year of NAV, charged monthly
Performance fee	20% of gains above the high-water mark; no hurdle; accrued monthly and crystallized annually on December 31 and on redemption
Subscriptions	Monthly, at NAV per share
Redemptions	Quarterly, on the last day of each calendar quarter, with 60 days' written notice
Lock-up	One-year hard lock-up from each subscription
Gate	Fund-level: redemptions capped at 20% of the fund's NAV on any quarterly dealing date, scaled back pro rata; unpaid amounts carried forward to the next dealing date
Administrator	An independent fund administrator: calculates NAV, keeps the register of investors, and processes subscriptions and redemptions
Prime brokers	Two large banks; the master fund's assets and financing are split between them
Auditor	An independent audit firm, auditing the annual financial statements

Kessling Harbor Equity Long/Short Fund: monthly report extract, December of year 3 (illustrative)

Figure	Value
NAV per Class A share, December 31 of year 3, before the year-end performance fee	$120.00
NAV per Class A share, December 31 of year 2	$106.00
High-water mark per Class A share (set after the year 1 performance fee)	$112.50
December return, before the year-end performance fee	+2.0%
Year-to-date return, before the year-end performance fee	+13.2%
Master fund capital (NAV)	$400m
Long positions, as a percentage of capital	135%
Short positions, as a percentage of capital	85%
Annualized volatility since launch	9.0%
Maximum drawdown since launch (from a peak of $114.00 in September of year 1 to a trough of $95.00 in June of year 2)	16.7%
Position detail	Summary exposures only; individual positions are not disclosed

Returns are net of management fees and fund expenses. The December and year-to-date returns are shown before the performance fee, which the administrator will crystallize when it finalizes the December 31 NAV.