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1、Chapter 26 - Hedge Funds26-1Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.CHAPTER 26: HEDGE FUNDSPROBLEM SETS1. No, a market-neutral hedge fund would not be a good candidate for an investors entir
2、e retirement portfolio because such a fund is not a diversified portfolio. The term market-neutral refers to a portfolio position with respect to a specified market inefficiency. However, there could be a role for a market-neutral hedge fund in the investors overall portfolio; the market-neutral hed
3、ge fund can be thought of as an approach for the investor to add alpha to a more passive investment position such as an index mutual fund.2. The incentive fee of a hedge fund is part of the hedge fund compensation structure; the incentive fee is typically equal to 20% of the hedge funds profits beyo
4、nd a particular benchmark rate of return. Therefore, the incentive fee resembles the payoff to a call option, which is more valuable when volatility is higher. Consequently, the hedge fund portfolio manager is motivated to take on high-risk assets in the portfolio, thereby increasing volatility and
5、the value of the incentive fee.3. There are a number of factors that make it harder to assess the performance of a hedge fund portfolio manager than a typical mutual fund manager. Some of these factors are Hedge funds tend to invest in more illiquid assets so that an apparent alpha may be in fact si
6、mply compensation for illiquidity. Hedge funds valuation of less liquid assets is questionable. Survivorship bias and backfill bias result in hedge fund databases that report performance only for more successful hedge funds. Hedge funds typically have unstable risk characteristics making performance
7、 evaluation that depends on a consistent risk profile problematic. Tail events skew the distribution of hedge fund outcomes, making it difficult to obtain a representative sample of returns over relatively short periods of time.4. The problem of survivorship bias is that only the returns for survivo
8、rs will be reported and the index return will be biased upwards. Backfill bias results when a new hedge fund is added to an index and the funds historical performance is added to the indexs historical performance. The problem is that only funds that survived will have their performance added to the
9、index, resulting in upward bias in index returns.Chapter 26 - Hedge Funds26-2Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.5. The Merrill Lynch High Yield index may be the best individual market i
10、ndex for fixed income hedge funds and the Russell 3000 may be the individual market index for equity hedge funds. However, a combination of indexes may be the best market index, as it has been found that multifactor model do the best in explaining hedge fund returns. Of equity hedge funds, market ne
11、utral strategies should have a return that is closest to risk-free, but they are not risk free. 6. Funds of funds are usually considered good choices for individual investors because they offer diversification and usually more liquidity. One problem with funds of funds is that they usually have lowe
12、r returns. This is a result from both the additional layer of fees and cash drag (resulting from the desire for liquidity).7. Of the equity hedge funds, market neutral strategies should have a return that is closest to risk-free; however, they are not completely risk-free and typically have exposure
13、 to both systematic and unsystematic risks.8. No, statistical arbitrage is not true arbitrage because it does not involve establishing risk-free positions based on security mispricing. Statistical arbitrage is essentially a portfolio of risky bets. The hedge fund takes a large number of small positi
14、ons based on apparent small, temporary market inefficiencies, relying on the probability that the expected return for the totality of these bets is positive.9. Management fee = 0.02 $1 billion = $20 millionPortfolio Rateof Return (%)Incentive Fee(%)Incentive Fee($ million)Total Fee($ million)Total F
15、ee(%)a. -5 0 0 20 2b. 0 0 0 20 2c. 5 0 0 20 2d. 10 20 10 30 310. The incentive fee is typically equal to 20 percent of the hedge funds profits beyond a particular benchmark rate of return. However, if a fund has experienced losses in the past, then the fund may not be able to charge the incentive fe
16、e unless the fund exceeds its previous high-water mark. The incentive fee is less valuable if the high-water mark is $67, rather than $66. With a high-water mark of $67, the net asset value of the fund must reach $67 before the hedge fund can assess the incentive fee. The high-water mark for a hedge fund is equivalent to the exercise price for a call option on an asset with a current market value equal to the net asset value of the fund.Chapter 26 - Hedge Funds26-3Cop
