Question
Question 1.3 (d) (e) (f) on attachment!! (d)Suppose that an investor has $40 invested in the active fund and $60 in cash (measured in thousands,
Question 1.3 (d) (e) (f) on attachment!!
(d)Suppose that an investor has $40 invested in the active fund and $60 in cash (measured in
thousands, say). What investments in the passive fund, the hedge fund, and cash (i.e., the riskfree
asset) would yield the same market exposure, same alpha, same volatility, and same
exposure to ???????? ? As a result, what is the fair management fee for the hedge fund in the sense
that it would make the investor indifferent between the two allocations (assume that the hedge
fund charges a zero performance fee)?
e. If the hedge fund charges a management fee of 2%, what performance fee makes the expected
fee the same as above? Ignore high water marks and ignore the fact that returns can be negative,
but recall that performance fees are charged as a percentage of the (excess) return after
management fees. Specifically, assume the performance fee is a fraction of the hedge fund?s
outperformance above the risk?free interest rate.
f. Comment on whether it is clear that hedge funds that charge 2?and?20 fees are ?expensive?
relative to typical mutual funds. More broadly, what should determine fees for active
management?
1.4. Styles and Strategies
EXERCISES FOR Exercises for Efficiently Inefficient Contents Preface to the Exercises PART I: ACTIVE INVESTMENT 1 Understanding Hedge Funds and Other Smart Money 2 Evaluating Trading Strategies: Performance Measures 3 Finding and Backtesting Strategies: Profiting in Efficiently Inefficient Markets 4 Portfolio Construction and Risk Management 5 Trading and Financing a Strategy: Market and Funding Liquidity PART II: EQUITY STRATEGIES 6 Introduction to Equity Valuation and Investing 7 Discretionary Equity Investing 8 Dedicated Short Bias 9 Quantitative Equity Investing PART III: ASSET ALLOCATION AND MACRO STRATEGIES 10 Introduction to Asset Allocation: The Returns to the Major Asset Classes 11 Global Macro Investing 12 Managed Futures: Trend-Following Investing PART IV: ARBITRAGE STRATEGIES 13 Introduction to Arbitrage Pricing and Trading 14 Fixed-Income Arbitrage 15 Convertible Bond Arbitrage 16 Event-Driven Investments Lasse Heje Pedersen 2 Exercises for Efficiently Inefficient Preface\tto\tthe\tExercises This compendium of exercises is meant to be used with the book on Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined, by Lasse Heje Pedersen, Princeton University Press, 2015. The compendium contains exercises for each chapter in the book, except the introductory chapters (i.e., chapters 6, 10, 13). I am grateful for feedback from students and colleagues at New York University Stern School of Business and Copenhagen Business School and especially to Niklas Kohl for taking the lead on developing several of the exercises (7.17.6, 9.89.12, 16.116.8). Several of the exercises require additional material, which is distributed separately. For example, several problems rely on data to be processed in a spreadsheet such as Excel, while other problems rely on financial statements such as merger offers. Professors who use the book can contact me for this material. Lasse Heje Pedersen 3 Exercises for Efficiently Inefficient 1. Exercises\tfor\tUnderstanding\tHedge\tFunds\tand\tOther\tSmart\tMoney 1.1. Selection vs. Timing. Explain the meanings of market timing and security selection, highlighting their similarities and differences. 1.2. Biases. You work as an analyst at a discretionary equity hedge fund. You have the investment thesis that it pays to buy the \"best in breed\
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