Exchange Traded Products, Purchased Life Annuities, Hedge Funds, Absolute Return Funds, Sharia Compliant Investments

Question 1

What is an ETF

Answer 1

1. Exchange Traded Fund
2. Index-Tracking Fund that is listed and traded on major stock markets.
3. Can use sampling/optimisation or fully replicating
4. Can use swap to replicate return and expose to counterparty risk (synthetic replication)

Question 2

What is an ETC

Answer 2

1. Exchange Traded Commodity
2. Tracks performance of underlying commodity or index valuing commodity

Question 3

What is an ETN

Answer 3

1. Exchange Traded Note
2. Tracks an index
3. A type of bond issued by a bank.
4. Has a maturity date but doesn’t pay interest
5. returns linked to performance of market index less mgmt. fees

Question 4

Explain a Purchased Life annuity

Answer 4

1. Purchased contract to pay a given level of income for life
2. 2 Elements:
   
   • Capital Element - tax free
   • Income element - taxed as savings income

Question 5

What alternative strategies do Hedge Funds use?

Answer 5

1. Hedge against market downturns
2. invest in asset classes trading below true value
3. use return enhancing tools such as gearing

Question 6

What is the Aim of a hedge fund

Answer 6

1. Absolute return
2. Seek higher risk-adjusted rates of return
3. Limit downside risk

Question 7

Explain the 4 Investment strategies of Hedge Funds

Answer 7

1. Long/Short Funds - Invest in equities/bonds but also invest in short sales of individual securities to reduce market exposure.
2. Relative Return Funds - Rely on arbitrage to produce returns
3. Event-Driven Funds - use anticipated corporate events and price movements to get returns
4. Tactical Trading Funds - Trade in all asset types and use the same long/short approach

Question 8

Risks with Hedge Funds

Answer 8

1. Difficult to establish due to different strategies
2. High gearing = magnified losses
3. Expensive

Question 9

Explain Absolute Return Funds

Answer 9

1. Aim for positive absolute return in all market conditions
2. Focus on value created purely by fund manager v. absolute return objective eg. Cash
3. Can also use derivatives

Question 10

Explain structured products

Answer 10

1. Investment Vehicles that offer tailored risk and return
2. Wrapper not investment product
3. ‘structuring’ can include offering participation in return of index/fund

Question 11

Characteristics of Structured products

Answer 11

1. Fixed Term
2. either return of capital or income
3. Min./Max. returns are pre-specified
4. Can include ‘Kick-out’ features - matures early if performance threshold reached

Question 12

Types of Structured Product

Answer 12

1. 100% Capital Protection - receives return on underlying index or specified fixed return if index has risen, if not 100% capital returned
2. Partial Capital Protection - Set return/income offered, capital only protected if index doesn’t fall below set amount.
3. No protection - 100% exposure to index

Question 13

Risks of Structured products

Answer 13

1. Return
2. Risk profile - assets, protection
3. Costs
4. Encashment - penalties?, liquidity
5. Credit Risk

Question 14

3 Common Sharia-compliant Funds

Answer 14

1. Equity Funds
2. Commodity Funds
3. Ijarah Funds

Question 15

Restrictions in investing for muslims

Answer 15

1. Cant pay interest
2. cant make unlawful investments eg. alcohol, pork products