The mutual funds industry

Question 1

What are mutual funds? (2)

Answer 1

1. pool the resources of many small investors by selling them shares and using the proceeds to buy securities (i.e., to form a portfolio of securities).
2. Each investor has a claim to the portfolio established by the investment company in proportion of the amount invested.
3. NAV: Net asset value (total value - liabilities/costs)
   (it accounts for 5.2 trillion of the retirement market)

Question 2

What are the benefits of mutual funds? (5)

Answer 2

1. Liquidity intermediation: investors can convert investments quickly into cash, whilst still allowing the fund to invest for the long term
2. Denomination intermediation: investors can participate in equity and debt offerings that, individually, require more capital than they possess
3. Diversification: investors immediately realize the benefits of diversification even for small investments (the only free lunch in investing)
4. Cost advantages: the mutual fund can negotiate lower transaction fees than would be available to the individual investor.
5. Managerial expertise: many investors prefer to rely on professional money managers to select their investments.

Question 3

What is the mutual fund structure? (2 types)

Answer 3

1. Closed-End Fund: A fixed number of nonredeemable shares are sold through an initial offering and are then traded in the OTC market. Price for the shares is determined by supply and demand forces.
2. Open-End Fund: investors may buy or redeem shares at any point, where the price is determined by the net asset value (NAV) of the fund.

Question 4

What are the four primary classes of mutual funds available to investors?

Answer 4

1. Stock funds: Capital appreciation funds, total return funds, world equity funds,
2. Bond funds: strategic income bonds (corporate), Gov bond funds, world bond funds,
3. Hybrid funds: (stocks and bonds)
4. Money market funds: invest only in money market securities, however not federally insured

Question 5

How does mutual fund regulation work?

Answer 5

1. In the European Union, funds are governed by laws and regulations established by their home country.
2. Mutual recognition regime that allows funds regulated in one country to be sold in all other countries in the European Union, but only if they comply with certain requirements.

Question 6

What are exchange traded funds?

Answer 6

1. Similar to mutual funds, but are traded on an exchange, like a stock
2. Most track an index
3. largest provider of this type of fund: blackrock, state street global adviser, vanguard

Question 7

What are hedge funds?

Answer 7

1. pools capital from wealthy individuals or institutional investors.
2. They may invest in many asset classes, using a variety of sophisticated strategies, often with the use of derivatives (big short)

different from mutual funds:

1. low transparency and little current regulation (usually only to investors)
2. high minimum investment caps
3. long term commitment of fund is required
4. liquidity: lock up periods and redemption notices

Question 8

what are the different hedge fund strategies? (5)

Answer 8

1. Global Macro – invest in equities, bonds or currency markets in anticipation of global macroeconomic events or trades.
2. Directional – either long, short or variations of long/short.
3. Event-driven – attempt to exploit events such as consolidations, acquisitions, recapitalizations, bankruptcies, and liquidations.
4. Relative Value – apply arbitrage strategies to take advantage of relative discrepancies in price between securities.
5. Fund-of-Funds – a hedge fund that invests in other hedge funds