Notesale: Turn your study into money

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Financial Products, Markets & Services
Investment Funds

By: Jerome M
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 Set-up as a company
 Quoted on a stock exchange
 Open-ended
The London Stock
Exchange has a special
subset of the Exchange
for ETFs, called
extraMARK

Exchange-Traded Fund
(ETF)
Buy shares in
an ETF
through a
stock
exchange via
stockbrokers
...

Shareholders can
also make a capital
gain (or loss) by
selling their shares
...
g
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But an ETF is priced according to market demand
...

We have come across the term Net Asset Value (NAV) before
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ETF Pricing
ETF shares may trade at a premium or discount to the underlying investments,
but the difference is minimal and the ETF share price essentially reflects the
value of the investments in the fund
...

 Example: an agriculture-based ETF
when a major grain exporting
country is experiencing drought

 Similarly, if the underlying assets go
suddenly out of favour, the price of an
ETF can dip below the NAV
...

 ETFs are listed on the stock exchange
and bought through stockbrokers
 While unit trusts are priced once a
day, shares in ETFs are traded on the
stock exchange, so the prices move
throughout the day
...


 ETFs can track any traded financial asset:
 ETFs are now available for commodities and corporate
bonds
...


 ETFs charges are less expensive than many open-ended funds:
 ETFs do not levy front-end charges, early redemption
penalties or exit charges
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1 or 0
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• An annual management charge is deducted from the
fund (typically 0
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• Commission paid when shares are bought or sold
• No stamp duty paid on purchases

Introducing Hedge Funds
Why are they called “hedge”funds?

The purpose of a hedge
is to mark a boundary,
or to form a barrier
against something
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In their original form, hedge funds
sought to eliminate or reduce
market risk

From that original
concept derives the
expression “to hedge
against” something,
meaning to guard
against the risk of loss
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There are few restrictions as to what they do with their investors’
money to provide them with a return
Type of Strategy Employed
Details
Reduce market risk by going both “long”
and “short” on the same or similar financial
assets, or by using derivatives to lay off
some of the investment risk

To go “long” means buying a security

Most hedge funds aim to achieve “absolute
return”

Attempt to profit regardless of the
general movements of the market, by
carefully selecting a combination of
asset classes, including derivatives, and
by holding both long positions and short
positions

Some hedge funds place a greater
emphasis on producing highly geared
returns than on controlling market risk

Borrow funds and use derivatives to
potentially enhance their returns
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Accessing hedge funds
Most hedge funds are established as unauthorised collective
investment schemes
...

 Unauthorised investment schemes cannot be
marketed to private individuals because they are
considered too risky for the less financially
sophisticated investor
...
Access is therefore restricted to wealthy
investors and institutions (pension funds and insurance
companies)

 Being unauthorised means they can invest in
whatever assets they wish
...

 However, investors can also gain access to hedge
funds through funds of hedge funds which can involve
lower minimum investment levels

LOTS OF MONEY

Most hedge funds
require minimum
investments in
excess of £50,000;
some exceed £1
million

Managing transactions and Fees
Most hedge funds appoint a prime broker to handle their transactions
...

The prime broker is who the hedge fund will
buy and sell investments from, borrow from
and, often, entrust the safekeeping of their
assets to
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Performance fees can be substantial, with 20% of
the performance above certain levels (often termed
‘net new highs’ or the ‘high water mark’) being
common

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