Chapter 17 Summary - book \"Financial Markets and Institutions\" PDF

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Chapter 17:Types of Investment Company Funds  Close ended Funds: o Mutual funds are open ended in that the number of shares outstanding fluctuates daily with the amount of share redemptions and new purchases o Demand for shares determines the number of shares outstanding o Close ended investment co...

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Chapter 17: Types of Investment Company Funds  Close ended Funds: o Mutual funds are open ended in that the number of shares outstanding fluctuates daily with the amount of share redemptions and new purchases o Demand for shares determines the number of shares outstanding o Close ended investment companies: specialized investment companies that have a fixed supply of outstanding shares o Close funds offer a fixed number of shares at one time o Trading a premium: when demand for the investment company’s shares is high, the supply of shares in the fund is fixed, the shares can trade for more than the NAV of the securities held in the fund’s portfolio o Trading at a discount: when demand for share sis low, the value of the close-end funds shares can fall to less than the NAV of its assets Hedge Funds  Hedge fund are investment pools that invest for wealthy individuals and other investors  Similar to mutual funds in that they are pooled investment vehicles that accept investors’ money and generally invest it on a collective basis  Not subject to regulations such as requiring o certain degree of liquidity, o regulations regarding mutual funds be shares be redeemable at any point, o regulations protecting against conflict o do not have disclose to third party  limit to 100 investors or less who must be accredited investors, income of at least $200,000 or a net worth of $1M o allow hedge funds to avoid regulation under the theory that individuals with such wealth should be able to evaluate their own risk  they can use aggressive strategies that are unavailable to mutual funds, including short selling, leveraging, program trading, arbitrage and derivatives trading  Types of Hedge Funds o More risky:  Market directional these funds seek high returns using leverage, typically investing based on anticipated events o Moderate Risk: o Market neutral or value orientation these funds have moderate exposure to market risk, typically favoring a longer-term investment strategy o Risk Avoidance  Market neutral these funds strive for moderate, consistent returns with low risk  Fees on Hedge Funds o Management fees  Computed as a percentage of the total assets under management and typically runs between 1.5 and 2.0 percent

o Performance fees  Give the fund manager a share of any positive return on a hedge fund o Hurdle rate: which is a minimum annualized performance benchmark that must be realized before a performance fee can be assessed o High water mark: used for hedge funds in which the manager does not receive a performance fee unless the value of the fund exceeds the highest net asset value it has previously achieved...