1. PROFESSIONAL ASSET MANAGEMENT

2. Basic Categories
Private Management: Clients each have a separate account {popular with institutions}
Account 1
Investor 1 $ $
Asset manager $
Account 2 $
Investor 2
Account

3. Basic Categories
Investment Companies: Sell shares of the fund and invest the proceeds in a portfolio of stocks, bonds, or other assets
Investor 1
Fund Shares $$
Fund Portfolio $
Asset manager
Investor 2
Fund Shares

4. Professional Asset Management vs. Individuals
1. Diversification 2. Record Keeping 3. Professional Management 4. Lower Transaction Costs

5. Net Asset Value Example Market Value = $100 mil
Number of Shares = 10 mil
NAV = $100 / 10 = $10 / share
Suppose Market Value goes up to $ mil, the management fees during that period were $0.1 mil, and the fund issued an additional one million shares. What is the ending NAV?
NAV = ( – 0.1) / 11 = $11.25 / share

6. Mutual Funds
Fund manager is always willing to buy back (redeem) shares or sell additional shares at the NAV.
Shares may not be bought from or sold to anyone except the Fund.
Shares of the fund are always valued at NAV (calculated at the end of each day).
Total number of shares outstanding will change as fund sells/buys shares.

7. Mutual Funds
World-wide, there is more than $30 trillion of AUM (assets under management) in mutual funds
About one-half of that is in U.S. funds
52% of U.S. funds are equity funds
81.6% of U.S. equity funds are actively managed

8. Loads: Sales Charge Front End: Paid when shares are purchased.
3% of NAV is typical
Back End: Paid when shares are redeemed
5-10% fee on sale. Typically drops by 1% every year.
No-Load: No sales charge.

9. 12b-1 Fees
An alternative to a load to cover advertising & marketing expenses. Can be found in both loaded and no-load funds
Can deduct as much as .75% of assets annually to cover fund advertising & marketing.

10. Records Fees
Funds can charge as much as .25% of assets annually for records fees.

11. Management Fees Range is typically .20% to 1.00%.
Does not include trading commissions

12. Expense Ratio
Expense Ratio = Annual Expenses/$ Amt of Fund Assets Annual Expenses are: Management fees, 12b-1 fees, records fees (NOT front or back-end loads and not trading commissions)

13. Expense Ratio
Studies find that funds with lower expense ratios earn higher (net) returns than those with higher expense ratios.

14. Taxes
Mutual funds have pass-through-status which means that taxes are paid only by the investor, not the mutual fund.
Capital gains are passed through to investors who owned shares of the fund during the year when the fund sold the security
This means that investors can be taxed on gains they never received
It might be better to buy shares of a fund at the beginning of the year than at the end of the year
Not an issue if in a tax-deferred retirement account

15. Performance
Many Studies find active managers (on average) underperform benchmarks after costs and fees by about 1% per year.
Good performance is associated with low expense ratio.
Very low correlation between top funds one year and top funds the next year.
Some positive correlation between bottom funds one year and bottom funds the next year.
Investors tend to put more money in funds that have recently done well
Investors in mutual funds tend to overweight growth stocks

16. ETFs Exchange Traded Funds Close-end index funds Most trade on AMEX
Indexes for every sector, region and style
Most trade on AMEX
Low expense ratios
Trade like stocks
Can be shorted
Can be purchased on margin
More transparent than mutual funds
Trade very close to NAV

17. Hedge Funds Similar to Mutual Funds Lightly Regulated
Only open to “Accredited” Investors
Only recently allowed to advertise
No secondary market
Not regularly marked-to-market due to illiquid investments
Can be highly leveraged
Often require a lockup period for investors

18. Common Hedge Fund Investment Strategies
Long/Short – Market Neutral
Convertible Arbitrage
Merger Arbitrage
Statistical Arbitrage
Distressed Companies

19. Compensation Structure
Management Fee similar to mutual funds
Usually 1-2% of AUM(assets under management)
Performance Fee – typically 20% of profits
Leads to emphasis on absolute return rather than relative return
May be a hurdle rate for performance fee

20. Results Often difficult to know for sure Some appear to be very high
Some studies say the industry averages are no better than mutual funds
Additional fees can cut into positive results – Especially funds of funds

21. Some Well-Known Hedge Funds
Renaissance
Citadel
Millenium
Paulson and Co.
Maverick
S.A.C. Capital Advisors