Mutual funds (see Ch. 24 Reilly and Brown)
<ul><li>Diversification </li></ul><ul><li>Professional management </li></ul><ul><li>Low capital requirement </li></ul><ul>...
<ul><li>Used as a basis for valuation of mutual funds. </li></ul><ul><ul><li>Selling new shares </li></ul></ul><ul><ul><li...
<ul><li>Money Market  </li></ul><ul><li>Fixed Income </li></ul><ul><li>Equity </li></ul><ul><li>Balance & Income  </li></u...
<ul><li>Mutual funds </li></ul><ul><ul><li>Open-End </li></ul></ul><ul><ul><li>Closed-End </li></ul></ul><ul><ul><li>( Sto...
<ul><li>Fee Structure </li></ul><ul><ul><li>Front-end load </li></ul></ul><ul><ul><li>Back-end load </li></ul></ul><ul><li...
Mutual funds: Performance <ul><li>It’s not conclusive </li></ul><ul><li>Most of the studies suggest that the average MF un...
Exchange Traded Funds <ul><li>Are similar to closed-end funds: traded securities; entails commission costs </li></ul><ul><...
Alpha <ul><li>Alpha = mutual fund return – benchmark return </li></ul><ul><li>Higher the Alpha better the fund performance...
Treynor Ratio r p  - r f ß p Risk Adjusted Performance:Treynor/Beta <ul><li>r p  = Average return on the portfolio  </li><...
Sharpe Ratio r p  - r f p   Risk Adjusted Performance: Sharpe Higher the Sharper ratio better the fund performance <ul><...
Morningstar rating <ul><li>Created in 1984 to provide comprehensive assessment of  mutual funds </li></ul><ul><li>The star...
Hedge Funds <ul><li>Considerable confusion exists concerning hedge funds – </li></ul><ul><ul><li>what they are (and are no...
Hedge Funds <ul><li>Are not allowed to advertise broadly and engage in </li></ul><ul><li>“  general solicitation” to the i...
Hedge Fund Strategies <ul><li>Long-short equity </li></ul><ul><li>Equity market neutral </li></ul><ul><li>Fixed-income arb...
Learning objectives <ul><li>Discuss the different ways the professional asset management firms can be organized (p. 996-99...
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Class notes meeting 3

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Class notes meeting 3

  1. 1. Mutual funds (see Ch. 24 Reilly and Brown)
  2. 2. <ul><li>Diversification </li></ul><ul><li>Professional management </li></ul><ul><li>Low capital requirement </li></ul><ul><li>Reduced transaction costs </li></ul><ul><li>Access to illiquid markets </li></ul><ul><li>Access to non-traditional trading strategies </li></ul>Investment Companies An investment company invests a pool of funds belonging to many individuals in a portfolio of individual investments such as stocks and bonds Benefits:
  3. 3. <ul><li>Used as a basis for valuation of mutual funds. </li></ul><ul><ul><li>Selling new shares </li></ul></ul><ul><ul><li>Redeeming existing shares </li></ul></ul><ul><li>Calculation: </li></ul><ul><li>Market Value of Assets – Fund Expenses - Liabilities </li></ul><ul><li> Shares Outstanding </li></ul>Net Asset Value
  4. 4. <ul><li>Money Market </li></ul><ul><li>Fixed Income </li></ul><ul><li>Equity </li></ul><ul><li>Balance & Income </li></ul><ul><li>Asset Allocation </li></ul><ul><li>Indexed </li></ul><ul><li>Specialized Sector </li></ul>Mutual Funds: Investment Policies
  5. 5. <ul><li>Mutual funds </li></ul><ul><ul><li>Open-End </li></ul></ul><ul><ul><li>Closed-End </li></ul></ul><ul><ul><li>( Stock trades on secondary market; Net asset value (NAV) is determined daily, but market price determined by supply and demand) </li></ul></ul><ul><ul><li>- ETFs (Exchange Traded Funds) </li></ul></ul><ul><li>Hedge Funds </li></ul><ul><li>Private equity/venture capital funds </li></ul>Types of Investment Organizations
  6. 6. <ul><li>Fee Structure </li></ul><ul><ul><li>Front-end load </li></ul></ul><ul><ul><li>Back-end load </li></ul></ul><ul><li>Operating expenses </li></ul><ul><li>12 b-1 charges </li></ul><ul><ul><li>distribution costs paid by the fund </li></ul></ul><ul><ul><li>Alternative to a load </li></ul></ul><ul><li>Fees and performance </li></ul>Costs of Investing in Mutual Funds
  7. 7. Mutual funds: Performance <ul><li>It’s not conclusive </li></ul><ul><li>Most of the studies suggest that the average MF underperforms its benchmark </li></ul><ul><li>There is some evidence of short-term performance persistence </li></ul><ul><li>The evidence show that it’s not easy to find funds that outperform </li></ul><ul><li>for a long period of time </li></ul><ul><li>Nonetheless, “hot” funds receive a disproportionately amount of </li></ul><ul><li>new money </li></ul>
  8. 8. Exchange Traded Funds <ul><li>Are similar to closed-end funds: traded securities; entails commission costs </li></ul><ul><li>Each ETF is a claim on a trust that holds a specified pool of assets (e.g. S&P500 index components) </li></ul><ul><li>Examples:SPDRs, ishares,HOLDERS </li></ul><ul><li>Advantages: </li></ul><ul><ul><li>Liquidity </li></ul></ul><ul><ul><li>Taxes </li></ul></ul><ul><ul><li>Can be purchased on margin or sell short </li></ul></ul><ul><li>ETF are appropriate for short-term investors and the ones who buy in large lots </li></ul>
  9. 9. Alpha <ul><li>Alpha = mutual fund return – benchmark return </li></ul><ul><li>Higher the Alpha better the fund performance </li></ul>
  10. 10. Treynor Ratio r p - r f ß p Risk Adjusted Performance:Treynor/Beta <ul><li>r p = Average return on the portfolio </li></ul><ul><li>r f = Average risk free rate </li></ul><ul><li>ß p =  portfolio   </li></ul><ul><li>Higher the Treynor ratio better the fund performance </li></ul>
  11. 11. Sharpe Ratio r p - r f p   Risk Adjusted Performance: Sharpe Higher the Sharper ratio better the fund performance <ul><li>r p = Average return on the portfolio </li></ul><ul><li>r f = Average risk free rate </li></ul>p = Standard deviation of portfolio return
  12. 12. Morningstar rating <ul><li>Created in 1984 to provide comprehensive assessment of mutual funds </li></ul><ul><li>The star system was not meant to predict future performance </li></ul><ul><li>5* - the top 20% of the funds 1* the bottom 20% </li></ul>
  13. 13. Hedge Funds <ul><li>Considerable confusion exists concerning hedge funds – </li></ul><ul><ul><li>what they are (and are not) and how they work </li></ul></ul><ul><li>Hedge funds are privately organized, pooled investment vehicle with no restrictions in terms of investment strategies, asset classes and use of leverage </li></ul><ul><li>Many of them registered off-shore for tax and regulatory reasons </li></ul><ul><li>Can’t have more than 100 “accredited” investors or 500 “super-accredited” investors </li></ul><ul><li>Accredited investor: net worth > 1 million or income of $200,000 in each of the past two years </li></ul><ul><li>Super-Accredited investor: net worth > 5 million </li></ul>
  14. 14. Hedge Funds <ul><li>Are not allowed to advertise broadly and engage in </li></ul><ul><li>“ general solicitation” to the investing public </li></ul><ul><li>Charge 1-2% of assets under management and 20-25% of profits </li></ul><ul><li>First hedge fund on record, Jones Hedge Fund, was established in 1949 </li></ul><ul><li>He hedged the US equity market risk and focused on stock selection </li></ul><ul><li>By 2001, more than 5,000 funds in existence world-wide </li></ul><ul><li>Common features: </li></ul><ul><li>- shorting </li></ul><ul><li>- leverage </li></ul><ul><li>- concentration </li></ul><ul><li>Do they all hedge? </li></ul>
  15. 15. Hedge Fund Strategies <ul><li>Long-short equity </li></ul><ul><li>Equity market neutral </li></ul><ul><li>Fixed-income arbitrage </li></ul><ul><li>Convertible arbitrage </li></ul><ul><li>Merger arbitrage </li></ul><ul><li>Global macro </li></ul><ul><li>Special situations </li></ul>
  16. 16. Learning objectives <ul><li>Discuss the different ways the professional asset management firms can be organized (p. 996-998 in chapter) </li></ul><ul><li>Discuss how the managers at investment advisory firms and mutual funds are compensated (p. 996-998 in chapter) </li></ul><ul><li>Discuss the differences between open end, closed end and ETFs </li></ul><ul><li>Briefly discuss the costs, loads and fees of investing in mutual funds </li></ul><ul><li>Discuss what the hedge funds are, and how do they differ from traditional professionally managed investment products </li></ul><ul><li>Discuss five strategies used by hedge funds (p. 1021-1022 chapter) </li></ul><ul><li>Discuss these two ethical conflicts in the professional asset management industry: </li></ul><ul><li>Incentive Compensation Schemes and Soft Dollar Arrangements (see p. 1030-1031 in chapter) </li></ul>

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