A fund sponsor has adopted a formal policy to guide its manager evaluations. Cecilia Velasco
and Alberto Roca, two staff members, are discussing the performance of hedge fund managers
and traditional fund managers.
Velasco and Roca begin by discussing how to evaluate hedge fund managers. Velasco suggests
that hedge fund performance should be evaluated by comparing the manager’s performance with
the median of a universe of hedge funds with similar mandates.
A.
Justify, with
threereasons, why Velasco’s suggestion for evaluating hedge fund manager
performance is inappropriate.
(6 minutes)
Velasco and Roca also appraise the performance of two traditional European equity managers.
As part of the monitoring process, they have collected the information shown in Exhibit 1.
Assume that it is appropriate to compare the performance of the two managers.
Exhibit 1
Five-year Performance Data ending 30 April 2009
(Annualized)
Performance Measure Manager #1 Manager #2
Rate of return (%) 21.13 21.13
Sharpe ratio 1.17 1.21
M2(%) 18.72 19.27
Active risk (%) 2.17 4.18
Information ratio 0.52 0.27
Treynor measure (%) 19.15 17.17
Risk-free rate (%) 2.75 2.75
B.
Determine, for
eachcase below, the
mostappropriate performance measure from Exhibit
1 to compare Manager #1 and Manager #2.
Identify, in
eachcase, which manager
outperformed.
Explainwhat caused the difference in performance between the two
managers.
i. Reward per unit of systematic risk incurred
ii. Reward per unit of total risk incurred
iii. Reward per unit of risk earned by deviating from the benchmark’s holdings
ii.
Calculatethe amount at risk from a credit loss on the long JPY put option
contract.
Determinewhich party bears the credit risk.
Showyour calculations.
pace:none'>4 Pay floating, receive fixed 2 years Semi-annually
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Level III
B.
Determinewhich swap
best
achieves Smith’s stated goals.
Justifyyour response with
tworeasons.