Mutual and Hedge Funds

Investing in Mutual Funds: Mutual funds are an investment that allows a group of investors to pool their money and hire a portfolio manager. The manager invests this money (the fund's assets) in stocks, bonds or other investment securities (or a combination of stocks, bonds and securities). The fund manager then continues to buy and sell stocks and securities according to the style dictated by the fund's prospectus. Mutual funds are popular because they offer a simple way to diversify an investment portfolio while letting a professional manager worry about buying and selling individual stocks. A Brief of How Mutual Funds Work: Mutual funds can be either or both of open ended and closed ended investment companies depending on their fund management pattern. An open-end fund offers to sell its shares (units) continuously to investors either in retail or in bulk without a limit on the number as opposed to a closed-end fund. Closed end funds have limited number of shares. Mutual funds have diversified investments spread in calculated proportions amongst securities of various economic sectors. Mutual funds get their earnings in two ways. First is the most organic way, which is the dividend they get on the securities they hold. Second is by the redemption of their shares by investors will be at a discount to the current NAVs (net asset values). Advantages: It may not be obvious at first why you would want to purchase shares in different securities through a mutual fund "middleman" instead of simply purchasing the securities on your own. There are, however, some very good reasons why millions of Americans opt to invest in mutual funds instead of, or in addition to, buying securities directly. Mutual funds can offer you the following benefits: •    Diversification •    Choice •    Liquidity •    Convenience •    Low Transaction Costs •    Additional Services •    Professional Management Hedge Funds: A fund, usually used by wealthy individuals and institutions, which is allowed to use aggressive strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage, and derivatives. Hedge funds are exempt from many of the rules and regulations governing other mutual funds, which allow them to accomplish aggressive investing goals. They are restricted by law to no more than 100 investors per fund, and as a result most hedge funds set extremely high minimum investment amounts, ranging anywhere from $250,000 to over $1 million. As with traditional mutual funds, investors in hedge funds pay a management fee; however, hedge funds also collect a percentage of the profits (usually 20%). Advantages: Hedge funds impact the economy by affecting the stock market. Since some hedge funds are so huge their impact can be global, causing changes in oil prices, commodities, retail goods and magnified effects on stocks and mutual funds. If they then leave the stock market, and invest in bonds or commodities, individual investors could be adversely affected. Hedge funds also help stock markets by acting as a source of liquidity, making major investments in publicly traded companies. Sometimes when a company requires new cash / investment, a hedge fund or foreign investment will come through when other sources of financing dry up. Hedge funds help the economy by giving companies other options for capital, especially when companies are concerned about taking on large foreign investments. How they work? Hedge fund's charge investment fees that typically includes a management fee, which is calculated as a fixed percentage of assets under management, and an incentive fee, which is calculated as a percentage of the fund's returns. Other "administrative" fees may also be charged. A fund might charge a 2% management fee and a 0.4% administrative fee in addition to a 20% incentive fee. If this fund managed USD 100MM and earned USD 18MM in income and capital gains over a year, the combined fee for the year would be: (0.024) (USD 100MM) + .20 (USD 18MM) = USD 6.0MM Strategies: Hedge funds pursue a variety of investment or trading strategies. These go by various names, and there is some overlap between strategies. Generally, they fall into three categories: •    Directional strategies involve taking positions that will benefit from broad market rises or declines. •    Market neutral strategies involve taking offsetting long and short positions within a specific market. The goal is to avoid net exposure to the overall market while benefiting from changes in the relative value of individual instruments within that market. •    Event driven strategies seek to exploit temporary mispricing associated with some corporate event, such as a merger or divestiture.
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