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Answer: Ensure that the hedge fund managers have a sizable amount of their own wealth invested in their fund.
The correct answer is C: Ensure that the hedge fund managers have a sizable amount of their own wealth invested in their fund. This is because risk sharing asymmetry occurs when the hedge fund manager benefits from upside risk through incentive fees but does not suffer the full consequences of downside risk, as they do not lose their own capital. By having a significant portion of their own wealth invested in the fund, the hedge fund manager is more likely to be conservative in their risk-taking and consider both upside and downside risks, thus mitigating the risk sharing asymmetry. Diversifying across different hedge fund strategies (A) or choosing a reputable manager (B) does not address the asymmetry issue, and requiring daily position reports (D) does not solve the problem due to the lack of transparency and potential biases in hedge fund reporting.
Author: LeetQuiz Editorial Team
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Hedge funds are known for their potential to deliver high returns, but they also come with significant risks, including the potential for risk-sharing asymmetry. This means that the gains and losses are not equally distributed, which can lead to unequal risk exposure for investors. Considering this, what steps can a pension fund manager take to mitigate the risk associated with this potential risk-sharing asymmetry in hedge fund investments?
A
Allocate the money across several different hedge fund strategies to diversify away the asymmetry in risk sharing.
B
Choose a reputable hedge fund manager that manages investments for other major pension funds.
C
Ensure that the hedge fund managers have a sizable amount of their own wealth invested in their fund.
D
Require the hedge fund to provide a daily position report to better monitor the potential asymmetry in risk sharing.
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