Tài chính doanh nghiệp - Chapter seventeen: Mutual funds and hedge funds

8-1McGraw-Hill/IrwinChapter SeventeenMutual Funds and Hedge Funds17-2McGraw-Hill/IrwinMutual Funds and Hedge FundsMutual Funds (MFs) and Hedge Funds (HFs) are financial institutions (FIs) that pool the financial resources of individuals and companies and invest those resources in portfolios of assetsThe first MF was established in Boston in 1924By 1970 360 MFs held about $50 billion in assetsMoney market mutual funds (MMMFs) were introduced in 1970Tax-exempt MMMFs were introduced in 1979By 2007 more than 8,000 MFs held over $12 trillion in assets17-3McGraw-Hill/IrwinMutual FundsCash flows into MFs is highly correlated with the return on the NYSEGrowth has also resulted from the rise in retirement funds under management by MFsMFs managed ~ 25% of retirement fund assets in 2007MFs are the second most important group of FIs as measured by asset size, second only to commercial banksBanks’ share of all MF assets has grown to 21% in 2007Insurance companies managed 10% of MF industry assets in 200717-4McGraw-Hill/IrwinMutual FundsThe barriers to entry in the MF industry are lowthe largest MF sponsors have not increased their market share recentlythe largest 25 MF companies managed 76% of industry assets in 1990the largest 25 MF companies managed 71% of industry assets in 2007the composition of the top 25 firms in the industry has changedseven of the largest 25 firms in 2007 were not among the top 25 in 199017-5McGraw-Hill/IrwinMutual FundsThe MF industry has two sectorsshort-term funds invest in securities with original maturities of less than one yearmoney market mutual fundstax-exempt money market mutual fundslong-term funds invest in portfolios of securities with original maturities of more than one yearequity funds consist of common and preferred stockbond funds consist of fixed-income capital market debt securitieshybrid funds consist of both stock and bond securities17-6McGraw-Hill/IrwinMutual FundsApproximately 25% of long-term funds are index fundsindex funds are funds in which managers buy securities in proportions similar to those included in a specified major indexindex funds involve little research or management, which results in lower management fees and higher returns than actively managed fundsExchange traded funds (ETFs) are also designed to replicate market indexestraded on exchanges at prices determined by the marketmanagement fees are lower than actively traded fundsunlike index funds, ETFs can be traded during the day, sold short, and purchased on margin17-7McGraw-Hill/IrwinMutual FundsMoney market mutual funds (MMMFs) provide an alternative investment to interest-bearing deposits at commercial banksbank deposits are relatively less risky, because they are FDIC insured, and generally offer lower returns than MMMFsHouseholds own the majority of MFsowned 69.6% of long-term funds in 2007owned 46.0% of short-term funds in 200748.0% of all U.S. households owned MFs in 2006—which represents ~56.3 million households17-8McGraw-Hill/IrwinMutual FundsMF managers must specify their funds investment objectives in a prospectus, which is made available to potential investorsholds lists of the securities invested in by the fundsin 1998 the Securities and Exchange Commission (SEC) mandated that prospectuses must be written in “plain English” instead of overly legal language (i.e., legalese)17-9McGraw-Hill/IrwinMutual FundsEquity funds represent 56.7% of MF assets in 2007 (~$5.9 trillion)capital appreciation funds (25.9%)world equity (12.6%)total return (18.2%)Hybrid funds represent 6.3% of MF assets (~$0.7 trillion)Bond funds represent 14.4% of MF assets (~$1.5 trillion)corporate bonds (2.6%)high-yield bonds (1.5%)world bonds (0.6%)government bonds (1.9%)strategic income bonds (4.3%)state municipal bonds (1.5%)national municipal bonds (2.0%)17-10McGraw-Hill/IrwinMutual FundsMoney market funds represent 22.6% of MF assets ($2.4 trillion)taxable funds (19.1%)tax-exempt funds (3.5%)Four of the five largest MFs in the U.S., as of February 6, 2008, were managed by the same companyAmerican Funds Growth;Aa growth fund with $91.4 billion in assetsAmerican Funds CWGI;Aan international fund with $83.0 billion in assetsAmerican Funds CIB;Aan income fund with $81.6 billion in assetsFidelity Invest: Contraa growth fund with $80.9 billion in assetsAmerican Funds InvCoAa growth/income fund with $73.5 billion in assets 17-11McGraw-Hill/IrwinMutual FundsInvestor returns from MF ownership reflect three componentsincome and dividends on portfolio assetscapital gains on assets bought and sold at higher pricescapital appreciation on assets held in the fundMF assets are usually marked to market dailyprices are adjusted daily to reflect changes in the current market prices of the portfolio’s assetsThen net asset value (NAV) of a MF share is equal to the market value of the assets in the MF portfolio divided by the number of shares outstanding17-12McGraw-Hill/IrwinMutual FundsAn open-end MF is a fund for which the supply of shares is not fixed but can increase or decrease daily with purchases and redemptions of sharesA closed-end investment company is a specialized investment company that has a fixed supply of outstanding shares, but invests in the securities and assets of other firmsA real estate investment trust is a closed-end investment company that specializes in investing in mortgages, property, or real estate company shares17-13McGraw-Hill/IrwinMutual FundsMFs charge investors fees for the services they providesales loads12b-1 fees are fees related to the distribution costs of MF sharescannot exceed 1% of average annual net assets for load fundscannot exceed 0.25% of average annual net assets for no-load fundsMFs may offer different share classes with different combinations of loadsA load fund is an MF with an up-front sales or commission charge that the investor must payA no-load fund is an MF that does not charge up-front sales or commission charges on the sale of mutual fund shares to investors17-14McGraw-Hill/IrwinMutual FundsMFs are heavily regulated because they manage and invest small investor savingsThe SEC is the primary regulatorThe Securities Act of 1933The Securities Exchange Act of 1934The Investment Advisers Act and Investment Company Act of 1940The Insider Trading and Securities Fraud Enforcement Act of 1988The Market Reform Act of 1990The National Securities Market Improvement Act (NSMIA) of 199617-15McGraw-Hill/IrwinMutual FundsEven with heavy regulation, investor abuses still occurmarket timing is short-term trading that profits from out-of-date values on the securities in the fund’s portfoliolate trading involves buys and sells long after prices have been set at 4:00 pm E.T.directed brokerage occurs when brokers improperly influence investors on their fund recommendationsimproperly assessed fees occur when brokers trick customers into thinking they are buying no-load funds or fail to provide discounts properly17-16McGraw-Hill/IrwinHedge FundsHedge funds (HFs) are investment pools that solicit funds from wealthy individuals and other investors (e.g., commercial banks) and invest these funds on their behalfsimilar to MFs, but not required to register with the SECsubject to virtually no regulatory oversight and thus generally can (and do) take significant riskdo not have to disclose their activities to third parties and thus offer a high degree of privacyHFs avoid regulation by limiting the number of investors to less than 100 and by requiring investors to be “accredited”accredited investors have net worth over $1 million or annual income over $200,000 if single (or $300,000 if married)17-17McGraw-Hill/IrwinHedge FundsHFs use more aggressive trading strategies than MFs such as short selling, leverage, program trading, arbitrage, and the use of derivativesBecause HFs are not registered, they cannot be accurately tracked~ 9,000 HFs in the U.S. in 2008~ $2.8 trillion in assets in 2008~ new assets flow in at a rate of about $300 billion annually~ the 100 largest HFs control about 70% of the industry in 200817-18McGraw-Hill/IrwinHedge FundsThere are three basic types of HFsthe most risky HFs use market directional trading strategies, seek high returns using leverage, and invest based on anticipating eventsmoderate risk HFs have a market neutral (or value) orientation that favors longer-term investment strategiesrisk avoidance HFs take a market neutral approach and strive for consistent returns with low risk17-19McGraw-Hill/IrwinHedge FundsManagement fees on HFs are computed as a percent of assets under management and run between 1.5% and 2%Performance fees give fund managers a share of any positive returns earnedthe average is 20%, but performance fees vary substantially depending on the HFa hurdle rate is a benchmark that must be realized before a performance fee can be assesseda high-water mark is when a manager does not receive a performance fee unless the value of the fund exceeds the highest NAV it has previously achievedOffshore HFs are attractive to investors because they provide anonymity and are not subject to U.S. taxes17-20McGraw-Hill/IrwinHedge FundsHFs are exempt from registration requirements set forth by the Investment Company Act of 1940HFs have less than 100 investors each, accredited investors, and are sold only as private placementsHFs are prohibited from abusive (i.e., illegal) trading practicesIn 2003 the SEC recommended that large HFs register with the SEC as investment advisorsapproximately 25% of HFs were already registeredIn 2007 the U.S. Treasury, the Federal Reserve, the SEC, and the CFTC concluded that current HF regulation was sufficient