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Explanation:
The correct answer is C.
Investing in a hedge fund with multiple managers can help mitigate the risk of fund closure by unsuccessful fund managers. This is because each manager would have a smaller stake in the total capital, reducing the impact of any one manager's poor performance on the overall fund. This strategy also promotes diversity in investment strategies, as different managers may have different areas of expertise and investment philosophies. This can lead to a more balanced and resilient portfolio. Furthermore, having multiple managers can increase accountability and reduce the likelihood of risky bets, as decisions are typically made collectively. Examples of large hedge funds that employ multiple managers include Bridgewater Associates, AQR Capital.
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Q.2585 Justin Boucher is planning to invest in a hedge fund. However, he is worried about the compensation structure of the fund. The compensation structure is designed in such a manner that the fund managers are entitled to receive 20% of the profits generated by the fund. Boucher feels the compensation structure would entice fund managers to take unreasonable and risky bets which may have a higher chance of going wrong. He recalls a recent article about hedge fund managers taking failed risky bets and then closing the fund to start a new hedge fund.
One of the ways of mitigating the risk of closure of the fund by unsuccessful fund managers is:
A
To invest in a smaller hedge fund.
B
To invest in a hedge fund with a small number of managers.
C
To invest in a hedge fund with multiple managers.
D
All of the above.