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FMI week 5 Investment funds - Coggle Diagram
FMI week 5 Investment funds
Overview
Pooled savings from a large number of individuals
Typically managed by professionals
benefits
Denomination intermediation
asset diversification
economic of scale, lower costs
Managed funds
close end fund
initially sells its share, obtain cash and invest with
a fixed number
of share outstanding
similar to shares
: fixed number and can be traded on secondary market
Net Asset Value(NAV) or book value
market price determined by supply and demand, may not equal to NAV
mostly listed
, secondary market is crucial
can hold very illiquid assets and use significant leverage
open end fund
allows
additional investment
from existing and new investors, allow
withdraw
funds at a
closing NAV
no limit to number of shares
investor own pro rata share of entire portfolio
entry and exit
require notice
can be
listed or unlisted
hold certain cash without sacrificing performance
Fees consist of
operating expenses
and
front-end/back-end load
.
strategy:
determine mix of assets held by funds
Active:
attempt to outperform index by actively selecting/trading stocks
Passive
: buy a portfolio to mimic an index
ETFs
investment funds traded on exchange that invest in a basket of securities and track performance of a index or benchmark
mostly
passive
.
open-ended
with flexibility to enter and exit.
Authorised participants(APs)
as stock brokers to create/purchase fund units, fund assemble with weighted securities and deliver to AP to sell to investors.
typically does not change holdings except
rebalance
advantages
portfolio diversification
continuous price and trading
closely tracked ??
transparency
tax benefit
lower fees
easily shorted
Hedge funds
Hedge funds take advantage from both underpricing and
overpricing
comparison with managed funds
less transparency
only large investors
significant minimum investment size
highly leveraged with long-short strategy
focus on absolute return instead of benchmark
high
watermark
lockup period and redemption notice
incentive compensation
Hedge funds strategies
Market directional strategie
Equity long/short
based on fundamental value
market timing:
forecast macroeconomic variables, buy indexes
Short selling:
short sell overvalued securities
Corporate restructuring strategies
Distressed securities: invested in
financial distressed
firms
Merger/Risk arbitrage:
long in acquired company and short in acquiring company, if success, stock of target trade will below purchase price and make profit, otherwise a great loss.
Convergence trading strategies
Fixed income arbitrage
: long/short in bonds and expect yield converge to historical levels
Convertible arbitrage
: long in convertible, short in underlying. cheap way to buy equity option in the bond.
Index arbitrage:
buying/selling a basket of stocks and counter position in index futures. risk-free arbitrage if the borrowing cost is lower than price difference
Opportunistic
Global macro:
invest in global markets
LTCM:
long underpriced non-US T bonds while short overpriced US treasury securities. following year Russian FC, have to liquidate and quit.
Main strategy is Equity strategy ??
Superannuation funds
government supported strategy with aim at providing resources that can be used up on
retirement
. relief burden from ageing population.
SGC act
requires employers to provide 9.5% super support to employees.
incentives to contributions
taxed at concessional rate 15%
withdraw at 60 are free of tax
two types of superannuation funds
Defined benefit
employer states the benefit that employee will receive
fixed benefit
, could be flat dollar amount/percentage of average salary/a unit benefit formula
underfunded
if assets do not cover PV of future benefits. US is underfunded
sponsor
are responsible for making contribution. no guarantee what amount will be available.
Employee bears the risk of
whether can get adequate retirement income.
Defined contribution
amount received depends on contribution made by employees
contributes are
known
, % of employee salary
funded
types of funds by function
Corporate funds:
specific corp, non-public offer
Industry funds:
specific industry, public offer, public can join
Public sector funds:
employees of government and state-owned
retail super funds:
run by large financial institutions, roll over funds
small APRA funds
: regulated by ARPA fewer than 5 members
self-managed super funds:
less than 4 members, all are trustees, regulated by ATO rather than APRA, grow substantially post FC, account for larger pool of super funds
Fund performance analysis
measures
relative
to a
benchmark
HPR
for absolute return
use beta to measure risks
measures take both return and risks
Sharpe ratio:
amount of excess return earned per unit of risk
Jensen's alpha
Information ratio
normally fund advisors cannot beat the market