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Mutual Funds and Hedge Funds
 

Mutual Funds and Hedge Funds

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    Mutual Funds and Hedge Funds Mutual Funds and Hedge Funds Presentation Transcript

    •  
    • Overview
      • In this segment: Mutual Funds and Hedge Funds:
        • Activities of mutual
        • Size, structure and composition
        • Balance sheets and recent trends
        • Regulation of mutual funds
        • Activities of hedge funds
        • Global issues
        • Size, structure and composition
        • Balance sheets and recent trends
        • Regulation of hedge funds
    • Mutual Funds
      • Diversification opportunities enhanced for small investors
        • Economies of scale
        • Predominantly open-ended funds
    • Mutual Funds
      • Rapid growth in funds during the 1990s
      • Slower rate of growth in the industry in early 2000s than in 1990s
        • Trading abuses contributed to slowdown
      • 2007:
        • Almost 7,100 stock and bond mutual companies.
        • Total assets of $8.21 trillion.
        • 8,125 firms and $10.57 trillion if money market mutual funds included
    • Size, structure and composition
        • First mutual fund: Boston, 1924.
        • Slow growth, initially.
        • Advent of money market mutual funds, 1972.
          • Regulation Q.
        • Total assets in stock and bond mutual funds:
          • 1940: $0.5 billion.
          • 1990: $1,065.2 billion
          • 2000: $6,964.6 billion
          • 2006: $10,413.7
        • Institutional funds
          • 80 percent of retirement plan investments
    • Size, Structure and Composition
        • By asset size, mutual fund industry second most important FI group.
        • Recent inroads by commercial banks and insurance companies
          • Mellon purchase of Dreyfus
          • State Farm (9,000 agents)
          • As of 2006, insurance companies managed approximately 10% of mutual fund assets
    • Types of Mutual Funds
      • Long-term funds
        • 74.3% of assets, 1999
        • 2002, long-term funds dropped to 62.1% of assets, losing ground to MMMFs
        • 75.4% in 2006
      • Types of Long-term Funds:
        • Bond and income funds.
        • Equity funds.
        • Hybrid.
    • Types of Mutual Funds
      • Short-term funds
        • 25.7% of assets, 1999.
        • 37.9% of assets, 2002.
        • 24.6% in 2006
        • Taxable and tax-exempt MMMFs
        • Generally higher returns than bank deposits but uninsured.
      • Impact of low interest rates during early to mid 2000s
        • Decline in MMMFs
        • Lowering of MMMF fees
    • Number of Mutual Funds
    • Interest Rate Spread and Net New Cash Flow to MMMFs
    • Overview of Mutual Funds
        • Objectives (and adherence to stated objectives), rates of return and risk characteristics vary.
      • Examples:
        • Capital appreciation funds
        • World equity
        • Corporate bond
        • High-yield bond
        • World bond
        • Government bond
    • Returns to Mutual Funds
        • Income and dividends of underlying portfolio.
        • Capital gains on trades by mutual fund management.
        • Capital appreciation in values of assets held in the portfolio.
          • Marked-to-market.
          • Net-asset value (NAV).
    • Web Resources
      • For information on the performance of mutual funds, visit:
      • Morningstar www.morningstar.com
    • Types of Funds
        • Open-ended funds: comparable to most corporate securities traded on stock exchanges.
        • Closed-end investment companies:
        • Fixed number of shares
          • Example: REITs.
          • May trade at premium or discount.
          • Exchange traded funds (ETFs)
        • Load versus no-load funds.
    • Mutual Fund Costs
      • Two types of fees:
        • Sales loads
          • Generally, negative effect on performance outweighs benefits
          • Short term versus long term investment alters impact of loads on cost
        • Fund operating expenses
          • Management fee
          • 12b-1 fees
          • Front end and back end fees
            • Class A, Class B and Class C differences
            • SEC creation of new rules
            • Sweeping decreases in fees, 2005 and 2006
    • Balance Sheet and Trends
      • Money Market Funds
        • Key assets are short-term securities (consistent with deposit-like nature)
          • 2006: $1,514.9 billion (65.5% of total assets)
        • Most have share values fixed at $1 and adjust number of shares owned by the investor.
    • Balance Sheet and Trends
      • Long-term Funds
        • Stocks comprised over 70.7 % of asset portfolios in 2006.
        • Credit market instruments 27.2% of asset portfolios
        • Shift to other securities such as credit market instruments, U.S. Treasuries, municipal bonds etc. when equity markets not performing as well.
    • Regulation
        • One of the most closely regulated among non-depository FIs.
        • Primary regulator: SEC
          • Emphasis on full disclosure and anti-fraud measures to protect small investors.
          • NASD supervises mutual fund share distributions.
    • Regulatory Changes
      • Prosecutions in light of trading abuses in early 2000s.
        • Market timing
        • Late trading
        • Directed brokerage
        • Improper fee assessments
      • Changes include: SEC requirements for independent board members; reporting and disclosure requirements
    • Legislation
        • Securities Act 1933, 1934
        • Investment Advisers Act, 1940.
        • Insider Trading and Securities Fraud Enforcement Act of 1988.
        • Market Reform Act of 1990
          • Allows SEC to halt trading and introduce circuit breakers.
        • National Securities Markets Improvement Act of 1996.
          • Exempts mutual fund sellers from state securities regulatory oversight.
        • Sarbanes-Oxley Act of 2002
    • Global Issues
      • Worldwide growth in mutual fund investment not as great as in the U.S.
        • $2.575 trillion in 1996 to $10.490 trillion in 2006
          • Over 307% growth
        • Larger returns in U.S.stock markets
        • Greatest development in countries with most advanced markets
        • Opportunities from declining Japanese markets
        • Efforts to reduce barriers for U.S. mutual fund sponsors
          • China and other Asian countries
    • Hedge Funds
      • Not technically mutual funds
        • Not subject to SEC regulation
        • Organized as limited partnership
          • Small number of sophisticated investors
        • Common feature is use of leverage
      • High returns in 1990s
    • Hedge Funds
      • Near collapse of Long-Term Capital Management
        • $3.6 billion bailout
        • Precipitated SEC scrutiny of hedge funds
    • Types of Hedge Funds
      • More risky
        • Market directional
      • Moderate risk
        • Market neutral or value orientation
      • Risk avoidance
        • Moderate, consistent returns with low risk as objectives
      • Fees
        • Generally management fees and performance fees
    • Offshore Hedge Funds
      • Major centers include Cayman Islands, Bermuda, Dublin, Luxembourg.
      • Rules
        • Generally not burdensome
        • Anonymity
        • Tax advantages
    • Regulation of Hedge Funds
      • Generally unregulated
        • Exemption for less than 100 investors
        • Exemption if accredited
      • Scandals such as Canary Capital Partners
          • Illegal trading with mutual funds
        • Amaranth Advisors, 2006
        • SEC scrutiny
    • Pertinent Websites
      • American Funds www.americanfunds.com
      • Federal Reserve www.federalreserve.gov
      • Fidelity Investments www.fidelity.com
      • Investment Company Institute www.ici.org
      • Morningstar, Inc. www.morningstar.com
      • NASD: www.nasd.com
      • SEC: www.sec.gov
      • Vanguard www.vanguard.com
      • Wall Street Journal www.wsj.com