Financial Risk Manager Part 2
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Which of the following is the best summary of the primary principal-agent risk (or problem) in the hedge fund industry, according to Fung and Hsieh?
A
Although "clearly of academic interest," there is neither credible evidence nor a plausible narrative in support of a realistic principle-agent problem in the hedge fund industry
B
The principle-agent risk arises due to the incentive fee structure and the high water mark (HWM) but can be mitigated by agents (fund managers) who invest a sizable amount of their own wealth in the fund
C
The principle-agent risk arises due to the fact that hedge fund managers have more information about the fund's investments than managers, and there is no easy solution to this principle-agent problem because the principals are not full-time investors themselves
D
The principle-agent risk arises due to the fact that the hedge fund manager, who charges a management fee as a percentage of assets under management (AUM), wants to grow the size of the firm rather than outperform, but this can be addressed simply by avoiding big funds in favor of small funds