FIN 010 Lecture Notes - Lecture 30: Santa Barbara City College, Long-Term Capital Management, Bernard Madoff
Document Summary
Factor model regression of hf index returns (rp): 2% assets + incentive fee (20% investment profits) Incentive fees = effectively call options on portfolio with. Aka manager gets fee if portfolio value rises but nothing loses if falls. High water mark: fee structure can give incentive to shut down poorly performing fund. If fund experiences losses, may not be able to charge incentive unless it recovers to its previous higher value thus with deep losses may be too difficult = closes. Funds that invest in one or more hedge funds. Diversification (spreads risk across several funds) but if various hedge funds have similar investment styles diversification may = illusory (be aware these funds of funds may operate with considerable leverage on top of leverage of the primary funds) Same approach exists for long-only investment funds. Supposed to provide due-diligence in screening funds for investment worthiness. Nb: bernie madoff scandal showed these advantages not always realised in practice.
