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Question 6 (6 marks) You are considering investing in a hedge fund. Before you make the decision of investing in the hedge fund, you need to do some research about it and here are some key questions you are trying to address: a. Describe your understanding of a hedge fund. What are the major two biases hedge fund data or performances could have? Also explain those two biases. (3 marks) b. Panel A and B below are two graphs extracted from previous research. The horizontal axis, serial correlation, is an indicator of illiquid portfolio holdings. Interpret those two graphs below. [3 marks] 0.45 0.30- 0.15 0.00 Sharpe Ratio -0.15- -0.30- -0.45 + -0.30 -0.20 -0.10 0.00 0.10 0.20 Serial Correlation 0.3% 0.2% 0.1% 0.0% 4 -0.1% Alpha% -0.2% -0.3% -0.4% -0.30 -0.20 -0.10 0.00 0.10 0.20 Serial Correlation