2.3 The standard hedge fund contract It is widely reported that hedge-fund operators often charge their customers two and twenty, where two is a percentage that is paid no matter what the return is and twenty is the percentage share of gains that is paid. Importantly, the operators do not share losses. Let's ignore the two part and focus on the sharing of gains. Assume that such a hedge-fund operator has customers who have invested an amount with pre-state value X>0 and that the operator chooses an asset (x1, L2, ..., xs), with Xs > 0 for all s and s=1ps&s = X. If state i occurs, then the operator gets .2 max{0, X; X}. Therefore, the pre-state value of what the operator gets is .2 S=1 Ps max{0, Xi X}. Exercise 12 Assume that the hedge-fund operator maximizes the pre-state value of their payoff. Let S = 2. What portfolio of assets should the hedge- fund operator buy? 2.3 The standard hedge fund contract It is widely reported that hedge-fund operators often charge their customers two and twenty, where two is a percentage that is paid no matter what the return is and twenty is the percentage share of gains that is paid. Importantly, the operators do not share losses. Let's ignore the two part and focus on the sharing of gains. Assume that such a hedge-fund operator has customers who have invested an amount with pre-state value X>0 and that the operator chooses an asset (x1, L2, ..., xs), with Xs > 0 for all s and s=1ps&s = X. If state i occurs, then the operator gets .2 max{0, X; X}. Therefore, the pre-state value of what the operator gets is .2 S=1 Ps max{0, Xi X}. Exercise 12 Assume that the hedge-fund operator maximizes the pre-state value of their payoff. Let S = 2. What portfolio of assets should the hedge- fund operator buy