Principal Asset Classes

Question 1

How is AER calculated when interest is paid more frequently than yearly?

Answer 1

(1+r)^n - 1

Where ^n is the number of compounding periods in a year (e.g. 4 for quarterly, 2 for semi-annual)

Question 2

What are risks associated with the way hedge funds are strucutred

not concerning what they hold / strategies

Answer 2

1) High initial investment size = concentration risk
2) Illiquid (lockout periods / gated)
3) High Cost
4) Domiciled in jurisdictions with weak protections

Question 3

What risks are associated with the way hedge funds operate / invest?

Answer 3

1) Narrow investment style (focus on 1 small event / situation)
2) Ability to short
3) Ability to leverage
4) Ability to use derivatives (adds counterparty & principal risk)

Question 4

How do hedge funds help to control/reduce risk

Answer 4

1) offer opportunity to diversify portfolio
2) low correlation to traditional risks (equity & bond)
3) Manager & investor alignment