Alternative investment vehicles
These investments offer alternative profits to organizations and exclude stock and bonds. Alternative investment vehicles include hedge funds, currency funds, options, futures, private equity offerings, and mutual funds. Alternative investment vehicles are created to manage the risk of the organization making investments beyond one sector. When one is investing in these investments, one relies on the professionalism of managers. Typically, the investor discusses his objectives with the management of the funds and as a result, they suggest alternative investment possibilities. The range of services can vary considerably under this type of arrangement and consequently so do the costs. However, the minimum costs of such a personal service are so high as to preclude this investment route for the typical small investor (Halbert, 2011).
An index is the measure of chosen stock performance in the market. It can be arrived at through weighing certain stocks or the aggregate of the market. The prices of the stocks that are components of the index can swing widely. At some price for the future index, this investor can get the same array of the outcome by investing all his money in treasury bills and buying a contract for future delivery of the index. It turns out that for this to be true, the futures must sell at a price equal to today’s price of the index. An index fund consists of a portfolio designed to reflect the composition of some broad-based market index it does so by holding securities in the same proportion as the index itself. Frequently, these index funds are constructed along the line of the S&P 500 Index that is the portfolio of the index fund is constructed in the same proportion concerning dollars involved as the S&P500 index. Therefore, by definition, the index fund is constructed to have a beta of 1.0 concerning the S&P500 index if that is the index being emulated. An ideal index fund would be one holding all available common stocks in exact proportion to their outstanding market value. However, such an idea fund would be impossible to contract and manage. Therefore, one hopes an S&P500 Index fund will be a good surrogate for this ideal type of fund.
Two other main reasons contributed to the growing interest in index funds. First, the expenses involved in handling a truly managed portfolio because the construction of the index-fund portfolio is entirely based on the maintaining proportions of the index being followed. As such, considerably lower transaction costs are involved because fewer purchases and sales of securities would take place. Furthermore, there would be much less need for expensive batteries of security analysts and portfolio managers. Thus, the overall administrative expenses would also be reduced. Second, with the passage of the new pension reform law, the investment trust laws surrounding the liability of portfolio they manage.
Management fees and performance fee
The management fee is a charge for managing funds that help to defray the cost of operating the portfolios including such expenses as brokerage fees, transfer costs, booking keeping expenses, and analysts’ salaries.
Performance fee relates to the fee charged for performing watching over the shares. The investors should carefully consider the nature and extent of fees that the various mutual funds and can significantly influence performance over time. The fees are disclosed in the fund’s prospectus as are many others facts about the fund its investment philosophy and management style.
All investment companies are in business to make money. The investor needs to realize that a no-load fund still has expenses that the investor must pay. Thus, the investor must match the performance objectives of the fund and the way it charges for its services with his objectives of the fund and the way it charges for its services with his objectives and time horizon for investing to make a prudent investment selection.
The hurdle rate and high watermark relate to these two as they determine how much the customer is going to charge (Halbert, 2011).
Short selling is the selling of shares that are not owned with the hope that the share prices are likely to fall, repurchase them later, and make a profit out of it. This activity of short selling creates potential demand and supply of shares in the market. It derives from speculation. Even though mispricing does persist in the real market certain limits to arbitrage exists. Thus, it can be concluded that arbitrage is limited within three aspects. Firstly, there is a high risk that mispricing will get worse, and thus it will cause a threat and risk to arbitrage as well. The behavioral bias within the market influence may be greater than the influence of arbitrageurs because arbitraging behavioral bias is not risk-free. Further, it takes longer than a normal investment horizon even if prices trend towards intrinsic prices. Secondly, financial models may be inaccurate and lastly, a high proportion of arbitrage activity requires short selling and short selling is risky and not permitted to many institutional investors.
Explain three key differences between “hedge funds” and “mutual funds”
Hedge funds state-specific investments objectives in their prospectuses. Growth funds typically possess diversified portfolios of common stocks in the hope of achieving large capital gains for their shareholders. The balanced fund generally holds a portfolio of diversified common stocks, preferred stocks, and bonds with the hope of achieving capital gains and dividend and interest income while at the same time conserving the principal. Income funds concentrate heavily on high-interest and high-dividend-yielding securities. Bond funds vary also in the average duration of their holdings. Portfolios with low durations are significantly less sensitive to changes in interest rates than those with high durations. The industry-specialized hedge fund specializes in investing in portfolios of selected industries such a fund appeals to investors who are extremely optimistic about the prospects for these few industries and are willing to assume the risks associated with such a concentration of their investment dollars. Families of funds have developed that allow investors to switch from a fund with one objective to a fund with a different objective for a modest fee. An investor might be motivated to do this as the stock market and interest rates go through various phases (Mobius, 2007).
Mutual funds. A mutual fund is characterized by the continual selling and redeeming of its shares. In other words, the mutual fund does not have a fixed capitalization. It sells its shares to the investing public whenever it can at their net asset value per share and it stands ready to purchase these shares directly from the investment public for their net asset value per share. In this case, of a “no-load” mutual fund the investment company sells its shares by mail to the investor. Because no salesperson is involved are sold there is no sales commission. In this case, “load” is added to the net asset value and a portion of the investor’s equity is removed as the “load” at the beginning of the contract to purchase shares. This process is called ‘front-end loading’ and thus the name load fund. The load charge or commission is generally about 6% of the sale price. Exit fees, or back-end loading, are also available.
Mutual funds state-specific investments objectives in their prospectuses. For example, the main types of objectives are growing balanced income and industry-specialized funds. Growth funds typically possess diversified portfolios of common stocks in the hope of achieving large capital gains for their shareholders. The balanced fund generally holds a portfolio of diversified common stocks, preferred stocks, and bonds with the hope of achieving capital gains and dividend and interest income while at the same time conserving the principal. Income funds concentrate heavily on high-interest and high-dividend-yielding securities. Bond funds vary also in the average duration of their holdings. Portfolios with low durations are significantly less sensitive to changes in interest rates than those with high durations. The industry-specialized mutual fund specializes in investing in portfolios of selected industries such a fund appeals to investors who are extremely optimistic about the prospects for these few industries and are willing to assume the risks associated with such a concentration of their investment dollars. Families of funds have developed that allow investors to switch from a fund with one objective to a fund with a different objective for a modest fee. An investor might be motivated to do this as the stock market and interest rates go through various phases.
Potential clients of Eurekahedge’s publication products reason/interest
- International banks – are involved in hedging
- Multinationals – hedging of foreign exchange risk
- Mutual funds investing international market
- Stock markets- compare the performance of investments
- Governments – to study the performance of derivatives that affects economies if they fail.
- Five recent M&A deals in the banking and finance sector
- Scotiabank of Canada and Banco Colpatria of Columbia
- Access Bank of Nigeria and Intercontinental
- M&T Bank and Wilmington trust
- Capital One and ING Direct USA
- JPMorgan Chase and Washington mutual
- Wells Fargo and Wachovia
- Bank of America and Merrill Lynch
- The parent company of Dresdner Kleinwort Investment Bank
- Dresdner Bank AG
- Name the Head of Sales for Citigroup Prime Brokerage in Asia and source for his contact details. Briefly explain his role
- David Murphy
- Name five of Eurekahedge’s direct competitors in the database aspect and state how you found this information
- Morningstar, Bloomberg, Barclayhedge, Completehedge, and Woodfield (Keywordspy.com, 2011.)
Summarize Eurekahedge and its business
Eurekahedge offers business information on funds that are in the market worldwide. They also help with professional advice. The database of the company is important as it is well researched and has current information on available vehicles of investments. Often, the investors feel they lack the education, background time foresight resources, and temperament to carry out the proper handling of their portfolio. When this occurs, the logical step is to hire a professional portfolio manager.
Halbert, G. 2011. Alternative investments’ – what are they? – part i. ProFutures, Inc. Web.
Keywordspy.com, 2011. Eurekahedge.com competitors. Web.
Mobius, M., 2007. Mutual funds: an introduction to the core concepts. New York: John Wiley and Sons.