SIE Unit 2 End- Hedge Funds and Risks

Common strategies for hedge funds

1. Highly leveraged portfolios (borrowing to purchase securities) 2. The use of short positions (selling the securities the portfolio does not own) 3. Utilization of derivative products such as options and futures 4. Currency speculation 5. Commodity speculation 6. Investments in politically unstable international markets

List some advantages of ETF's when compared to open-end (mutual funds)

1. Pricing and ease of trade. 2. Margin 3. Operating cost 4. Tax efficiency

What are disadvantages of ETF's over mutual funds?

1.Commissions 2.Overtrading 3. Market influences on price

ETN's are what like instruments with a state maturity date?

Bond like, but do not pay interest and offer no principle protection

What is considered the single greatest advantage of ETF's

Due to unlikely capital gains distributions there are no further tax consequences to the ETF investor

The notes track the performance of a particular market index, but do not represent ownership in a pool of securities the way share ownership of a fund does- this describes what?

Exchange Traded Note (ETN)

How do expenses for ETF's range in comparison to mutual funds?

Expenses and management fees tend to be lower

What is the primary investment objective of hedge funds?

Generating high returns; shouldering a substantial amount of risk.

How do hedge funds differ from mutual funds?

Hedge funds have more flexibility in the investment strategies employed

How are hedge funds similar to mutual funds?

Investments are pooled and professionally managed

How are ETF's registered?

Open-end fund or unit investment trust (UIT)

Hedge Funds are typically described as

Private investment companies

ETF's can be purchased in this way, which is different than MF

Purchased on margin and sold short

Hedge funds are considered unregulated are not registered with this

Security Exchange Commission

What is an Exchange Traded Note? (ETN)

Senior, unsecured debt securities issued by a bank or financial institution, and they are backed by the good faith and credit of the issuer

What is an ETF? (Exchange Traded Fund)

Similar to a MF that tracks an index. (S&P 500), but it trades like a stock on the floor of an exchange, and how it trades is similar to a closed-end fund rather than an open.

What type of investor are hedge funds suitable for?

Sophisticated investors; those meeting specific income and net worth criteria and those who are known as accredited investors

Exchange Traded Products (ETPs)

Trade intra-day on a national securities exchange

How are ETP's priced?

Value of the product is derived from other investment instruments, such as commodity, a currency, a share price, or an interest rate

Is it typical for hedge fund organizers to also be investors in the fund?

Yes, it is typical

What do ETN investors receive when the note matures?

cash payment linked to the performance of the underlying index minus management fees

What is a lock up provision?

minimum holding requirements of a hedge fund