Mutual Funds

What is Mutual Funds?

People should distinguish between three main types of investment companies. These organizations that focus on issuing in investing in securities divide into mutual funds, closed end funds and unit investment trust. Mutual funds are also known as open end organizations.
Mutual fund is an investment vehicle that lets many investors to pool the money. And then mutual fund enables these investors to have it jointly managed by an investment manager.
In general, the process of investing looks like this: a company recieves the money from investors and then it invests this money in some industry. An investment company deals with the money on the collective basis. Each investor is entitled to a "pro rata" share and participates in the profits and losses. Mutual fund distributes its income each year to avoid taxation. A distribution consists of capital gains, interest and dividend income. Distributions can be made monthly.

Fund of Funds

Fund of Funds are not perfect though, they come with their own unique drawbacks. The first to come to mind is the double layer of fees. When dealing with FoF, an investor must understand that the underlying funds charge a fee, as well as the Fund of Funds manager. This translates to “layers” of fees before the investor receives dollar one. Transparency issues are also important. Research such as the individual manager’s background and reputation, the nature of the investments that they are utilizing, and more are all issues a fund of fund manager must investigate. Therefore, you are relying on the FoF manager’s talent and expertise in choosing managers, when investing.

High Watermark

A "high water mark" is often applied to a performance fee calculation. This means that the manager does not receive performance fees unless the value of the fund exceeds the highest net asset value it has previously achieved. For example, if a fund were launched at a net asset value (NAV) per share of $100, which then rose to $130 in its first year, a performance fee would be payable on the $30 return for each share. If the next year it dropped to $120, no fee is payable. If in the third year the NAV per share rises to $143, a performance fee will be payable only on the extra $13 return from $130 to $143 rather than on the full return from $120 to $143. This measure is intended to link the manager's interests more closely to those of investors and to reduce the incentive for managers to seek volatile trades. However, this mechanism does not provide complete protection to investors: a manager who has lost money may simply decide to close the fund and start again with a clean slate assuming that he can persuade investors to trust him with their money. Some funds also specify a hurdle rate, which states that the fund will not charge a performance fee until its annualized performance exceeds a benchmark rate, such a fixed percentage, over some period. This links performance fees to the ability of the manager to do better than the investor would have done if he had put the money elsewhere. Funds which specify a soft hurdle rate charge a performance fee based on the entire annualized return. Funds which use a hard hurdle rate only charge a performance fee on returns above the hurdle rate.

Hedge Fund Regulations

Although the SEC is currently examining how it can address the Goldstein decision, commentators have stated that the SEC currently has neither the staff nor expertise to comprehensively monitor the estimated 8,000 U.S. and international hedge funds. One of the commissioners of the SEC has stated they are forming internal teams that will identify and evaluate irregular trading patterns or other phenomena that may threaten individual investors, the stability of the industry, or the financial world.

In February 2007, the President Bush's advisory group on Financial Markets rejected further regulation of hedge funds and said that the industry should instead follow voluntary guidelines.

Prime Brokerage

Prime Brokerage is the generic name for a bundled package of services offered by investment banks to hedge funds. The business advantage to a hedge fund for using a Prime Broker (PB) is that a PB provides a centralized securities clearing facility for the hedge fund. The result of having a centralized facility is it allows all the hedge fund's expenses and transactions to be more easily tracked. The Prime Broker benefits by earning fees ("spreads") on financing the client's long and short cash and security positions. The PB also charges, in many cases, fees for clearing and/or other services.
The following core services are typically bundled into the Prime Brokerage package:
• Global custody (including clearing, custody, and asset servicing)
• Securities lending – An exchange of stock or securities for some sort of collateral, usually cash equal or greater to the cost of the amount being borrowed.
• Financing - to facilitate leverage of client assets
• Customized Technology - provides hedge fund managers with portfolio reporting needed to effectively manage money
• Operational Support -prime brokers act as a hedge fund's primary operations contact with all other broker dealers.

Hedge Fund Structure

Many hedge funds are structured as master/feeder funds. In such a structure the investors will invest into a feeder fund which will in turn invest all of its assets into the master fund. The assets of the master fund will then be managed by the investment manager in the usual way. This allows several feeder funds (e.g. an offshore corporate fund, a US limited partnership and a unit trust) to invest into the same master fund, allowing an investment manager the benefit of managing the assets of a single entity while giving all investors the best possible tax treatment.

Hedge Fund Overview

Hedge Funds have become a fundamental aspect of the American stock market. From auspicious beginnings, they have grown into a force to be reckoned with. There currently exists over 200 hedge funds in the United States alone managing close to 1 trillion dollars! While they are a risky investment, the tantalizing rate of return continues to bring in investors. Will Hedge Funds rapid growth ever be clipped? It’s too hard to say but one thing is certain, as long as they remain largely unregulated, the veil of secrecy concerning their success and failures will remain largely unpierced.