Explanation:
Both open-end funds and hedge funds have low price transparency because they are not exchange-traded funds. They price their assets after the market closes, which creates price uncertainty for investors. Because they do not have lockup periods, open-end mutual funds are more liquid than hedge funds. Only hedge funds use performance-based fees and offer waivers (i.e., clawbacks and high-water marks) for periods of underperformance relative to a customized hurdle rate.
(Book 3, Module 29.2, LO 29.e)
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Question 36
A high net worth client is asking for advice on the differences between open-end mutual funds and hedge funds. Which of the following statements is an accurate description of your client?
A
Hedge funds have low price (i.e., net asset value) transparency, while open-end mutual funds have high price transparency.
B
Open-end mutual funds are more liquid than hedge funds.
C
Both options use an asset-based fee and a performance-based fee.
D
Only open-end mutual funds offer a fee waiver if the fund does not perform above a customized benchmark.
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