ECON 1 Lecture Notes - Lecture 2: Survivorship Bias, Regression Analysis, Abnormal Return
Document Summary
Transparency: hedge funds are usually set up as limited liability partnerships and provide minimal information about portfolio composition and strategy to their investors only. Investment strategies: may effectively partake in any investment strategy, may act opportunistically as conditions evolve, empowered to invest in a wide range of investments, not investing in uniform asset classes, 1: many focus on derivatives, distressed firms, currency speculations, convertible bonds, emerging markets, merger arbitrage, may jump from one asset class to another. Liquidity: often impose lock-up periods periods in which investors cannot redeem investments, also employ redemption notices limit the liquidity of investors, but enable the funds to invest in illiquid assets where returns migh be higher. Compensation structure: hedge funds charge a management fee of 1% to 2% of assets + a substantial incentive fee, equal to a fraction (20%) of any investments profits beyond a benchmark. Funds often operate with considerable leverage, returns can be quite volatile.
