The document discusses the services and roles of financial institutions and intermediaries, including asset management, portfolio management, and risk reduction. It also elaborates on asset/liability management, various types of investment, especially hedge funds, and outlines regulatory concerns. Additionally, it addresses the fee structures and compensation across different types of funds managed.

1. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall1
Financial Institutions,
Financial Intermediaries and
Asset Management Firms
Chapter 2

2. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H2
Services of Financial Institutions
Transforming Financial Assets
Exchanging Financial Assets on Behalf of
Customers
Exchanging Financial Assets for Own Account
Assisting in the Creation of Financial Assets
Providing Investment Advice
Managing Portfolios

3. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H3
Role of Financial Intermediaries
Transfer of funds from savers to investors
Types of Investments
Direct Investment
For example, purchasing a portfolio of stocks and
bonds
Indirect Investment
For example, purchasing an equity claim issued by
an investment company

4. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H4
Role of Financial Intermediaries
Providing Maturity Intermediation
Reducing Risk Through Diversification
Reducing Costs of Contracting and
Information Processing
Providing a Payments Mechanism

5. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H5
Role of Financial Intermediaries
Providing Maturity Intermediation
Reducing Risk via Diversification
Reducing Costs of Contracting and
Information Processing
Providing a Payments Mechanism

6. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H6
Asset/Liability Management
Spread and Non-Spread Businesses
Nature of Liabilities
Amount of cash outlay
Timing of cash outlay
Liquidity Concerns
Regulations and Taxation

7. 7
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 7
Nature of Liabilities of Financial
Institutions
Liability Type
Amount of Cash
Outlay
Timing of Cash
Outlay
Type I Known Known
Type II Known Uncertain
Type III Uncertain Known
Type IV Uncertain Uncertain

8. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H8
Concerns of Regulators
Credit Risk
Settlement Risk
Counterparty Risk
Liquidity Risk
Market Liquidity Risk
Funding Liquidity Risk
Market Risk
Operational Risk

9. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H9
Asset Management Firms
Ranked by assets under management

10. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H10
Fees and Compensation
Fee structure
Fee based on assets under management
Performance-based fee

11. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H11
Types of Funds Managed
Regulated investment companies
Insurance company funds
Separately managed accounts
Pension funds
Hedge funds

12. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H12
Hedge Funds
No single definition of hedge fund
George Soros
President’s Working Group on Financial
Markets
U.K. Financial Services Autority

13. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H13
Hedge Fund Characteristics
“Hedge” is misleading
Wide range of trading strategies
Leverage, short selling, arbitrage, risk control
Operate in all financial markets
Focus on absolute returns
Lastly, funds cater to sophisticated
investors

14. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H14
Types of Hedge Fund
Market directional hedge fund
Corporate restructuring hedge fund
Convergence trading hedge fund
Opportunistic hedge fund

15. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H15
Concerns with Hedge Fund
Hedge funds provide market benefits
Liquidity
Market pricing efficiency
However, there are concerns
System risk
Long-Term Capital Management
Bear Stearns
Market meltdown of 2008

16. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H16
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