Hedge Fund Investing: A Practical Approach to Understanding Investor Motivation, Manager Profits, and Fund Performance

Discussion Questions and Problems

1. What are some of the common characteristics of alternative investments?

2. How are alternative investment companies organized?

3. What are the common sources of a hedge fund's return?

4. How does leverage affect performance?

5. What sort of data is used to evaluate a fund's historical return distribution and why?

6. Assume a fund with $100 million in AUM has a trading profit of $15 million, net financing costs or carry of negative $5 million, and fund administrative costs of 0.50 percent.

a. What is the gross return on investment after financing costs but before any fund expenses or manager fees?

b. What is the gross return on investment after fund expenses but before any fees paid to the hedge fund manager?

7. What is the net return on investment in Question 6 after all fees, expenses, and manager compensation, assuming each of the following manager compensation arrangements?

a. Standard 2 percent management fee and 20 percent performance fee.

b. A 1 percent management fee and 15 percent performance fee.

c. A 0 percent management fee and 10 percent performance fee.

d. A 5 percent management fee and 35 percent performance fee.

e. Pass through of all management company expenses of $2 million plus a 25 percent performance fee.

8. What was the total compensation to the manager in dollars and as a percentage of investment under each of the scenarios in Question 7?

9. What is the percentage split of the gross return on investment ...