Question

A potential disadvantage to an investor in hedge funds is the: A. hurdle rate. B. lock-up period. C. high-water mark.​

Answer 1

Answer:

Hurdle rate and high-water mark are two types of benchmarks that hedge funds can set as requirements for collecting incentive or performance fees from investors. A high-water mark is the highest value that an investment fund or account has ever reached. A hurdle rate is the minimum amount of profit or returns a hedge fund must earn before it can charge an incentive fee.

Answer 2

Answer:

A potential disadvantage to an investor in hedge funds is the (Option B) lock-up period.

Explanation:

Hedge funds:

• A hedge fund is a type of investment instrument that targets accredited investors, institutional investors, and high-net-worth individuals.
• Because these funds historically concentrated on hedging risk by concurrently purchasing and shorting assets in a long-short equity strategy, the term "hedge" is used to describe them.

Advantages:

• Mutual funds, exchange-traded funds (ETFs), and hedge funds are all collections of money donated by numerous investors with the goal of making money for both themselves and their clients.

• Hedge funds are actively managed by professional managers who buy and sell specific investments with the declared goal of outperforming the returns of the markets, or some sector or index of the markets, similar to some mutual funds but less ETFs.

• Hedge funds seek the highest possible profits while taking the biggest risks to do so.

Disadvantages:

• They run the risk of suffering substantial losses when they choose concentrated investment strategies.

• Compared to mutual funds, hedge funds are frequently far less liquid.

• Investors are often required to place their money in a lockup for several years.

• Leverage or borrowing money can make a loss that would have been very small into a substantial loss.

Hence, the money invested is in its lock-up period for years is the disadvantage to an investor in hedge funds.

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