Financial Institutions

Question 1

What is a Hedge Fund?

Answer 1

• Hedge funds are financial partnerships that pool funds and use these pooled funds and employ different strategies to provide active returns for its investors
• Generally only accessible to accredited investors (large sums)

Question 2

What is the purpose and strategy of hedge funds?

Answer 2

• Use more aggressive and complex methods to bring returns such as making use of derivatives and leverage.
• Hedge fund teams mostly mimic traders than investors – they make mponey regardless whether the market is trending upwards or downwards
• Purpose is to maximise returns and minimise risks.

Question 3

What is a Proprietary Trading Firm?

Answer 3

• This is a financial firm or investment bank that invests directly for market gain as opposed to investing for clients to earn commission.
• Also known as prop trading

Question 4

What is involved in a proprietary trading firm?

Answer 4

• May involve the trading of stocks, commodities, bonds, currencies, etc.
• They believe they have a competitive advantage over index investing, bond yield, etc.
• Uses the firm’s capital and balance sheet to perform self-promoting financial transactions.

Question 5

What is an Asset Management Firm?

Answer 5

• An Asset Management Company (AMC) is a firm that invests pooled funds from clients, investing in stocks, real estate, etc.
• They’re distinguished by the amount of assets under management.

Question 6

What is involved in an Asset Management Firm? Give examples of them

Answer 6

• They manage High Net Worth Individuals (HNWI) as well as hedge funds, pension plans, etc.
• For smaller investors they create pooled asset funds which they can manage in a single centralised portfolio.
• Examples are Vanguard group, Fidelity investments.

Question 7

What is a High Frequency Trading Firm?

Answer 7

• These firms provide an automated trading platform that large investment funds, hedge funds and institutional investors employ.

Question 8

How does a High frequency trading firm work?

Answer 8

• Uses computers to automate, process and execute a huge number of transactions at high speeds
• High speeds and analysis gives those who use the platform an advantage in the open market
• Use complex algorithms to analyse the markets and spot emerging trends in fractions of seconds.
• Essentially they anticipate and beat trends in the market and execute buy/bid orders to provide profitable market moves for platform users.