Hedge fund managers receive incentive bonuses when they increase portfolio assets beyond a stipulated benchmark but lose nothing when they fail to perform.This equivalent to __________.

Question

Quizplus · Accepted Answer

Receiving a free call option means that the manager has the right to buy the portfolio assets at a certain price, but is not obligated to do so. If the portfolio assets increase in value, the manager can exercise the option and buy them at the lower price, making a profit. If the portfolio assets decrease in value, the manager can simply let the option expire, losing nothing. This is equivalent to the situation described in the question, where the manager receives a bonus if the portfolio assets increase in value, but loses nothing if they decrease in value.

Hedge Fund Managers Receive Incentive Bonuses When They Increase Portfolio