Hedge funds

5 important questions on Hedge funds

What are hedge funds, name 6 characteristics?

1) Private partnerships
2)  subject to minimal regulation.
3) Often only open to wealthy and institutional investors
4) Lock-up period in which investment cannot be withdrawn (could be several years)
5) illiquid assets
6) More risky strategies (derivatives, futures)

What is the most popular fee structure in hedge funds?

Two-twenty percent: 2% of management fees and 20% incentive fee of the profits

What is the high water mark?

It is a line where the returns has to get above to get this 20% incentive fee. If under no incentive fee
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What can lead to survivorship bias in hedge funds?

The closure of funds that didn't acquire the high water mark

What are possible sources of superior performance(6)?

  1. Skilled managers
  2. Illegal insider trading
  3. Exposure to omitted risk factors with positive risk factors, e.g. liquidity
  4. Changing factor loadings : could be that fund has different exposure to a certain beta during sample period
  5. Survivorship bias
  6. backfill bias: they only choose to report returns when it is going good. Not obliged to do so

The question on the page originate from the summary of the following study material:

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