Question

(a) Hedge funds earn a management fee plus an incentive fee that is a percentage of the profits, if any, that they generate (see Business Snapshot 1.3). How is a fund manager motivated to behave with this type of compensation package? (b) "Granting options to an executive gives the executive the same type of compensation package as a hedge fund manager and motivates him or her to behave in the same way as a hedge fund manager." Discuss this statement.

   (a) Hedge funds earn a management fee plus an incentive fee that is a percentage of the profits, if any, that they generate (see Business Snapshot 1.3). How is a fund manager motivated to behave with this type of compensation package?
(b) "Granting options to an executive gives the executive the same type of compensation package as a hedge fund manager and motivates him or her to behave in the same way as a hedge fund manager." Discuss this statement.

Options, Futures, and Other Derivatives

John C. Hull 10th Edition

Chapter 16, Problem 17

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This is because the incentive fee is directly tied to the fund's performance, so the manager has a strong incentive to generate positive returns. The management fee provides a steady income for the manager, regardless of the fund's performance. However, the Show more…

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(a) Hedge funds earn a management fee plus an incentive fee that is a percentage of the profits, if any, that they generate (see Business Snapshot 1.3). How is a fund manager motivated to behave with this type of compensation package? (b) "Granting options to an executive gives the executive the same type of compensation package as a hedge fund manager and motivates him or her to behave in the same way as a hedge fund manager." Discuss this statement.

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