A hedge fund charges the common 2 plus 20% fee structure, i.e. 2% management fee and 20% of any net (after management fees) profits. A pension fund invests in the hedge fund. In addition to the usual market risk from investing, what type of risk is faced by the pension fund manager investing in the hedge fund? Explain with respect to the hedge fund manager’s incentives

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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A hedge fund charges the common 2 plus 20% fee structure, i.e. 2% management fee and 20% of any net (after management fees) profits. A pension fund invests in the hedge fund.

In addition to the usual market risk from investing, what type of risk is

faced by the pension fund manager investing in the hedge fund? Explain with respect to the hedge fund manager’s incentives.

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