Activity 1 - One of the features that distinguishes alternative investments from traditional investments is the compensation structure. While traditional investment vehicles generally only charge a management fee, it is common for alternative investments such as hedge funds, private equity and venture capital to also charge an incentive fee.
a. Describe the mechanics of incentive fees and the explain the rationale for this alternative compensation structure.
b. How do incentive fees influence the behaviour of the manager and do they lead to any agency issues?
c. If the answer above is 'yes' then how can these agency issues be resolved
Activity 2 - Traditional mean/variance measures such as the Sharpe ratio show that for the period 1994-2016 the risk adjusted performance of most alternative investments is superior to traditional investments.
However, it can be argued that this approach seriously understates the risk of alternative investments, why is this the case?