Question 1
Consider a hedge fund whose annual fee structure has a fixed fee and an incentive fee with a high watermark provision. The fund manager earns an incentive fee only if the fund is above the high watermark of the maximum portfolio value since the inception of the fund.
Required:
Assess the positive and negative implications of the high watermark provision for the investors of the hedge fund.
Question 2
A hedge fund has compiled a list of French firms that it believes will outperform the overall French stock market by 7 percent over the year. It also has compiled a list of French firms that it believes will underperform the overall French stock market by 7 percent. The hedge fund wants to invest in a market-neutral long/short strategy on the French stock market. It has a capital of €25 million for this purpose. However, it would like to retain a cash cushion of €1 million for unforeseen events. The hedge fund can borrow shares from a primary broker with a cash margin deposit equal to 20 percent of the value of the shares. No additional costs are charged to borrow the shares.
Required:
Outline the appropriate strategy for the hedge fund. [Require only 100 words here]
Question 3
Sam Short, CFA, has recently joined the investment management firm of Green, Spence and Smith (GSS). For several years, GSS has worked for a broad array of clients, including employee benefit plans, wealthy individuals and charitable organisations. Furthermore, the firm expresses expertise in managing stocks, bonds, cash reserves, real estate, venture capital and international securities. To date, the firm has not utilized a formal asset allocation process but instead has relied on the individual wishes of clients or the particular preferences of its portfolio managers. Short recommends to GSS management that a formal asset allocation process would be beneficial and emphasizes that a large part of a portfolio's ultimate return depends on asset allocation. He is asked to take his conviction an additional step forward by constructing a proposal to the executive management.
Requirement
As a portfolio manager, had to establish a diversified portfolio and choose an asset.
The following portfolio must be recommended to GSS.
Compare and contrast 2 companies - had to be from the same industry.
What is the leverage can the hedge fund take on>?