Quiz - Hedge Fund Performance Evaluation period

Howd

Which type will outperform the other most of the time?


Long Lock up period vs Short lock up period

Young Fund vs Older Fund

Large Fund vs Smaller Fund

Iginla2011

It is discussed on V5 pg. 80-81.

pennyless

maratikus Wrote:
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> you don't have to agree with me on the risk
> premium perspective but that's just general
> finance stuff.

Oh, I get the concept of a risk premium. And after further thinking, I believe that and older fund, with a history of outperformance will command higher fees, so, on a net-of-fees basis (and that's the one that matters) I suppose older funds do pay less of a risk premium.

Still, there's no denying that if 10 hedge funds start up, only one of them exists 18 months later.

bodhisattva

Longer
Younger
Smaller


Those are your answers....

jmh530

you don't have to agree with me on the risk premium perspective but that's just general finance stuff.

dyga

what's the answer?

I dont buy the risk premium argument either, just because they demand it doesnt mean they can earn it. Investors can expect a higher return from longer lock ups and younger funds, but doesn't mean the funds will be able to deliver them.

The question asks which will deliver the outperformance, not which is expected to outperform to compensate the risk.

Very good question though..thnx for sharing.

IAmNeil

Long
Young
Smaller

I vaguely remember that Schweser had stated the above.

bkballa

Long
Old
Small

I am thinking old, because so many hedge funds disappear in their first few years, that you run a higher risk of picking a bad fund when you select from young ones. Whereas older funds (assuming same managers & process) seem to be stronger by virtue of still being in existence.

I'm not buying maratikus' risk premium theories simply because hedge funds don't price-adjust to compensate for risk the way that stocks do. A 100 million investment is buying the same amount of "fund share" regardless of whether its going into a new or old, large or small fund.


EDIT: I said bankin's risk prem, not maratikus



Edited 1 time(s). Last edit at Thursday, June 3, 2010 at 10:51AM by dlpicket.

lcw77

long - hm...just a guess on this one. But would say long because not forced to sell at a loss
older - survivorship bias
smaller - more nimble

Valores

boston21 Wrote:
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> Which type will outperform the other most of the
> time?
>
>
> Long Lock up period vs Short lock up period
>
> Young Fund vs Older Fund
>
> Large Fund vs Smaller Fund

I agree with steph's answers but let me give you some intuition behind those answers. You should always expect to be paid risk premiums.
> Long Lock up period vs Short lock up period
Liquidity premium -> long should outperform short

> Young Fund vs Older Fund
> Large Fund vs Smaller Fund
Premium for investing in small young funds. Additional risk demands corresponding premium.