Caia Level 1

is the highest NAV that incentive Fees were based on

managerial co -investing

- Strike price (higher of beginning NAV or HWM) -> negative relationship - Current NAV -> positive relationship - Risk -free interest rate -> positive relationship - Volatility of NAV -> positive relationship - Performance fee percentage -> positive relationship

- increase NAV volatility because volatility is positively related to the value of a call option - increase volatility when the option is far out of the money in an attempt to bring the option back into the money

- own money invested in the fund - poor performance will drive NAV further below HWM - poor performance leads investors to pull capital out of the fund which reduces the management fee - damaging reputation

- FOFs reflect the actual returns of a diversified investor - FOFs are less biased - the net performance of FOFs is net of costs (e.g. for portfolio construction)

- Directional strategies - Event risk strategies - Absolut return strategies - Diversified strategies

- increased return for a given level of risk - lower standard deviation - low correlation of hedge funds with traditional financial assets

when de primary goal is to enhance returns through identification of superior investments

- adding value through specialization (e.g. market segments, sector) - filling gaps of existing portfolios

fee bias

- they incorporate transaction impacts resulting from fund size - most indices from other financial products are also asset -weighted

- survivorship bias - selection bias - instant history bias - luquidation bias - participation bias

- Differencies in policies - Tax and regulation discrepancies - Business cycle disrepancies - Monetary policy mistakes - Macro country events - Behavioral biases - Divergent opinions

- market risk - event risk - leverage risk

- Financial reporting - Disclosure of trade information - Record keeping

- public commodity pools - private commodity pools - individual accounts

public commodity pools

Discretionary fund traders use fundamental analysis while systematic fund traders use technical analysis

Slippage

Degradation

- Trend -following Strategie - Non -Trend -following Strategie - Relative Value (Arbitrage)

- transparency risk - model risk - capacity risk - Liquidity risk - regulatory risk - lack of trends risk

- activist - distressed securities - merger arbitrage - multi -strategy -funds

selling insurance

- identifying corporations that do not maximize shareholder value - investing in positions that benefit from changes in corporate governance - Executing favorable corporate governance changes

- financial vs social activists - initiators vs followers - activists vs pacifists - friendly vs hostile - active vs passive

Agency costs

- Management, Compensation, and Board of Directors - Capital Structure and Dividend Policy - Mergers or Divestitures

traditional merger arbitrage

- regulatory risk - financial risk

A liquidation process takes places where all remaining assets of the firm are sold and proceeds are distributed to stakeholders

A reorganization process is put into place with the goal of reorganizing the firm so that it can continue operations after the bankruptcy proceedings are complete

Capital structure arbitrage