.

Question 1. One of the key features that distinguish Hedge Funds from Mutual funds is the compensation structure. While mutual funds generally only charge a management fee hedge funds usually also charge an incentive fee which is often accompanied by a high-water mark. Discuss the mechanics of and the rationale for the hedge fund compensation structure. Does this lead to any agency issues and if so how can they be resolved?

Question 2. Researchers have found that hedge fund returns often display a non- linear relationship with traditional asset classes which makes analysis using linear regression problematic. One way of overcoming these problems is to use option strategies as explanatory variables. Discuss the findings of Fung & Hsieh (2001) for Trend Followers and Mitchell &Pulvino (2001) for Risk Arbitrage highlighting not only what the option strategies are but also why they help to explain the returns of the underlying hedge fund strategies.

Question 3. Traditional mean/variance analysis as proposed by Markowitz shows that for the period 1994-2011 the risk adjusted performance of hedge funds is superior to traditional investments. However it can be argued that this approach seriously understates the risk of hedge fund investments. Discuss the limitations of the Markowitz approach with particular emphasis on the statistical properties of hedge fund returns.

Question 4. In 2000 approximately 17% of the assets invested in hedge funds came via funds of funds, by 2007 this proportion had grown to over 35%, however since the financial crisis this proportion has again reduced. What factors explained the popularity of funds of funds and why did investors choose to invest via this route rather than directly in the individual underlying hedge funds despite the additional fees? What factors have driven the subsequent reduction in popularity of funds of funds?