MANAGERS WHO CLOSE FUNDS THAT ARE NOT ACCEPTING NEW INVESTORS, THEI...

3. Managers who close funds that are not accepting new investors, their funds to new Appropriate the index is not investable. Therefore it is investment remain in the not a valid benchmark that reflects actual index as long as they report investment opportunities. Inappropriatetheir return information on a timely basis. 2006 Level III Guideline Answers Morning Session - Page 29

Part B Template for Question 10-B Questions from Prepare an appropriate response for each of the four questions committee members from the committee members The implied hedge fund hurdle rate is the minimum expected return “What is an implied investors should require for a particular hedge fund allocation. hedge fund hurdle rate?” The addition of hedge funds to a portfolio may reduce the total “In your presentation you portfolio volatility because there is typically a weak correlation state that an appropriate between hedge funds and other assets in the portfolio. Therefore implied hedge fund hedge funds need only to produce relatively small excess returns hurdle rate, for hedge over cash to enhance portfolio risk-adjusted returns. funds as a group, is 125 basis points above cash returns. Why is the hurdle rate so low?” While it is true that commodities futures are at least as volatile as “Commodity futures equities, commodity prices are generally not highly correlated with have higher volatility equity prices. Therefore the addition of commodities to the than equities, so how can portfolio should lower the overall portfolio volatility. adding commodity futures to the portfolio decrease overall portfolio risk?” Inflation is expected to have a positive correlation with commodity futures prices for two reasons: “Why may rising