Question

You operate a hedge fund where you manage a fund ($110 million) backed by investors who are your clients. As the fund manager, your goal is to make decisions to earn high returns for your investors and eliminate risk. One strategy you use to generate high yields for your clients is purchasing derivatives, or CDOs. One day, while reading the prospectus of different CDOs you notice that, while they yield high short-term returns, they are comprised mostly of subprime mortgages with teaser rates. You decide to purchase these CDOs. What other decision must you make?

The answer should be no more than one sentence.

Answer 1

As the fund manager, it is important to consider the potential risks associated with purchasing derivatives that are comprised mostly of subprime mortgages with teaser rates and make decisions to manage and mitigate this risk.