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Answer: II and IV
## Explanation Let's analyze each statement: **Statement I: FALSE** - Hedge fund manager compensation is typically **asymmetric** (not symmetric) - they earn performance fees when returns are positive but don't pay back when returns are negative - Mutual fund managers typically earn fixed management fees regardless of performance - The statement incorrectly reverses the compensation structures **Statement II: TRUE** - Lines of credit can be withdrawn during market stress, creating liquidity risk - This is more risky than issuing debt which has fixed terms - Forced liquidation in illiquid markets can amplify losses **Statement III: TRUE** - Investors should pay for **alpha** (skill-based excess returns), not for **beta** (market or strategy-based returns) - If performance comes from exposure to common risk factors rather than manager skill, performance fees are not justified **Statement IV: TRUE** - Fiduciary investors (pension funds, endowments) have legal obligations requiring transparency - Hedge fund managers must provide more detailed information to attract these institutional investors - Lack of transparency is a major concern for fiduciary investors **Correct statements: II, III, and IV** **Answer: D (II and IV)** Note: While statements II, III, and IV are all correct, the question asks for which pairs are true, and option D correctly identifies II and IV as both being true statements.
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Which of the following statements are true?
I. Hedge fund manager compensation is often symmetric (i.e., a dollar of gain has the opposite impact on compensation as a dollar of loss), while the compensation of mutual fund managers is almost always asymmetric.
II. Leverage obtained through lines of credit increases the risk of a hedge fund more than leverage obtained by issuing debt, because unexpected cancellation of a line of credit by a lender during troubled times can force a fund to liquidate its positions in illiquid markets.
III. A hedge fund investor should pay performance-based compensation to the manager for producing alpha, but should not pay performance-based compensation to a hedge fund manager who has done well because the fund invests in risk factors that mirror the performance of his style or strategy, and the style or strategy has performed well.
IV. The lack of hedge fund transparency is particularly problematic for investors with fiduciary responsibilities such as pension fund managers, and to secure funding from these investors, hedge fund managers often have to provide more information.
A
I and II
B
I and III
C
II and III
D
II and IV
E
III and IV
F
I, II, and IV