IIQE Paper 5 Investment Assets question: fund last paid a performance fee

IIQE Paper 5Investment Assets

A fund last paid a performance fee when its NAV per unit was HK$12.00. During the next year the NAV fell to HK$10.50, then rose to HK$11.80 by the year end. May a performance fee be paid for that year?

A no, because the NAV per unit is still below HK$12.00
B yes, because the NAV rose by HK$1.30 during the year
C yes, provided it is charged no more often than monthly
D no, because authorised funds may never charge a performance fee

Show the answer and explanation

Answer: A. no, because the NAV per unit is still below HK$12.00

Answer: no, because the NAV per unit is still below HK$12.00. A performance fee is payable only if the NAV per unit exceeds the NAV on which the fee was last calculated and paid (high-on-high). HK$11.80 is below HK$12.00.Why not the others:• yes, because the NAV rose by HK$1.30 during the year: A rise within the year is not enough; the NAV must exceed the level at which the fee was last paid.• yes, provided it is charged no more often than monthly: The fee may be paid no more than annually, and the high-on-high test is not met here anyway.• no, because authorised funds may never charge a performance fee: The Code allows a performance fee, subject to the annual and high-on-high conditions.Watch out: Measuring the gain from the year's low instead of from the last fee level.Rule: High-on-high: a performance fee is payable only when NAV per unit exceeds the NAV at which the fee was last paid, and no more than annually.Source: IA Investment-linked Long Term Insurance Examination Study Notes, 2024 Edition (7th ed., Nov 2024; for exams from 17 Feb 2025), 3.7.3(c), p. 3/36