1. Mutual Funds and Hedge Funds Chapter IV

2. Mutual Funds One of the attractions for small investors is the diversification opportunities. There are various kinds of mutual funds such as bonds funds, equity funds, hybrid funds, and money market funds. An investor of mutual funds owns a certain number of shares in the fund.

3. Mutual Funds The most common type of mutual funds is open- ended as investors buy more shares and vice versa. Shares can be sold and purchased anytime. Net asset value of the fund is calculated by dividing the total value of each asset in the fund by the total shares outstanding.

4. Mutual Funds Unlike open-ended mutual funds in which the total number of shares outstanding goes up as investors buy more shares or vice versa, closed- end funds have a fixed number of shares.

5. Index Fund Some funds are designed to track a particular index such as S&P 500. It can be done through buying all the shares in the index in amounts that reflect their weight. Or investor could choose to a have a smaller portfolio of representative shares.

6. Costs There are costs to owning mutual funds such as management expenses, sales commissions, accounting costs, transaction costs, etc. A front-end load is a fee charged to investors at the first-time buy. Back-end load is a fee charged to investors when selling shares.

7. Incentive of Hedge Fund Managers The fee structure gives hedge fund managers to make profits and take risks. Fund managers have a call option on the assets of the fund which increases in value as volatility rises. Managers could increase the option’s value by taking risks that increase the funds’ volatility.