The previous value of a portfolio that must be

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44. The previous value of a portfolio that must be reattained before a hedge fund can charge incentive fees is known as a ______. A. benchmark B. water stain C. water mark D. high water mark E. low water mark The previous value of a portfolio that must be reattained before a hedge fund can charge incentive fees is known as a high water mark. Difficulty: Moderate Short Answer Questions 45. Explain the five major differences between hedge funds and mutual funds. The five major categories of differences are transparency, investors, investment strategies, liquidity, and compensation structure. Mutual funds are more highly regulated by the SEC and thus are required to be far more transparent. However, hedge funds provide only minimal information about portfolio composition or strategy. Investors in hedge funds differ in that investment minimums were traditionally set at $250,000 to $1,000,000. While newer hedge funds are starting to reduce the minimum investment to $25,000, this minimum is outside the reach of many mutual fund investors. Mutual funds must provide an investment strategy and are restricted in the use of leverage, short selling, and in their use of derivatives. However, hedge funds are less restricted and frequently make large bets that can results in large losses over the short term. Mutual funds are liquid and investors can redeem shares at NAV and have proceeds within seven business days. Conversely, hedge funds often impose lock-up periods as long as several years and require redemption notices of several months even after the lock- up period is over. Thus, hedge funds a re far less liquid. While mutual funds charge a management fee, hedge funds add an incentive fee as well. This incentive fee is similar to a call option and the portfolio manager receives a "performance" bonus if the portfolio outperforms the chosen benchmark. Feedback: This question tests the students understanding of the major differences between hedge funds and mutual funds. Difficulty: Moderate 26-21
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