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
