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Explanation:
It is advisable for John to ascertain that the hedge fund managers have a substantial portion of their personal wealth invested in the hedge fund they manage. This tactic aligns the fund managers' interests with the investors', mitigating the asymmetry in risk-sharing. If a significant part of the managers' wealth is at stake, they are more likely to manage the fund in a manner that delicately balances risks and returns.
A is incorrect because, although spreading investments across multiple hedge fund strategies may diversify the risk, it doesn't necessarily mitigate the risk asymmetry. This issue is primarily due to fund managers possibly not having a considerable stake or alignment of interests with the investors.
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Q.2580 John McAdams, a pension fund manager, is considering diversifying the fund's portfolio by adding investments in hedge funds. However, John has serious concerns about the possible asymmetry of risk-sharing that typically comes with hedge funds. What strategy should John adopt to mitigate the potential risk asymmetry inherent in hedge fund investments?
A
Distribute the funds across various hedge fund strategies to ensure diversification of risk.
B
Choose a hedge fund manager who has an excellent reputation and manages portfolios for other large pension funds.
C
Verify that the chosen hedge fund managers have a substantial portion of their own assets invested in their respective funds.
D
Mandate daily position reports from the hedge fund to monitor closely for any possible risk asymmetry.