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41.How do hedge funds differ from mutual funds?

Difference Between a Mutual Fund and a Hedge Fund

Hedge funds and mutual funds are both “pooled” vehicles, but there are more differences
than similarities. For instance, a mutual fund is registered with the SEC, and can be sold
to an unlimited number of investors.
Most hedge funds are not registered and can only be sold to carefully defined sophisticated
investors. Usually a hedge fund will have a maximum of either 100 or 500 investors.
Mutual funds may advertise freely; hedge funds may not.
Other differences include:
Flexibility – the hedge fund manager has fewer constraints to deal with; he can sell short,
use derivatives, and use leverage. He can also make significant changes to the strategy if
he thinks it is appropriate. The mutual fund manager cannot be as flexible. If he changes
his strategy, he will be accused of “style drift”.
Paperwork – a mutual fund is offered via a prospectus; a hedge fund is offered via the
private placement memorandum.
Liquidity – the mutual fund often offers daily liquidity (you can withdraw at any time); the
hedge fund usually has some sort of “lockup” provision. You can only get your money
Absolute vs. Relative – the hedge fund aims for absolute return (it wants to produce
positive returns regardless of what the market is doing); the mutual fund is usually
managed relative to an index benchmark and is judged on its variance from that
Self-Investment – the hedge fund manager is expected to put some of his own capital at
risk in the strategy. If he does not, it can be interpreted as a bad sign. The mutual fund
does not face this same expectation.
42.Is investment banking a good career for someone who is afraid of taking risks? Why
or why not?
An investment banker’s job often involves tough decisions, keeping in mind the political
changes, various macroeconomic variables and the market trends. The ability to take risks
is important. You need to demonstrate adequate analytical skills and how they were used
in managing risk associated with a particular deal. You should highlight the logical
assumptions and calculated guesses made by you while undertaking a risky project or
decision. In an investment banking career, it is often more about being “roughly right”
than “precisely inaccurate.”

43.Should financial institutions be regulated in order to reduce their risk? Offer at least
one argument for regulation and one argument against regulation.
Regulation maybe able to reduce failures of financial institutions, which may stabilize the
financial system. The flow of funds into financial institutions will be larger if the people
who provide the funds can trust that the financial institutions will not fail. However,
regulation can also restrict competition. In some cases, it results in subsidies to financial
institutions that are performing poorly. Thus, regulation can prevent firms from operating
44.When a securities firm serves as an underwriter for an IPO, is the firm working for
the issuer or the institutional investors that may purchase shares? Explain the
a securities firm attempts to satisfy the issuer of stock by ensuring that the price is suffiently
high, but it must also ensure that it can place all the shares. It also wants to satisfy the
investors who invest in the IPO. If the investors incur losses because they paid too much
for the shares, they may not want to purchase any more stock from that underwriter in the

45. Discuss alternative measures of financial leverage. Should the market value of
equity be used or the book value? Is it better to use the market value of debt or the
book value? How should you treat off-balance-sheet obligations such as pension
liabilities? How would you treat preferred stock?
46. In general, the principles of cash cycle time management call for a firm to shorten
(minimise) the time it takes to collect receivables, and lengthen (maximise) the time it
takes to pay amounts it owes to suppliers. Explain what tradeoffs need to be managed if
the firm offers discounts to customers who pay early, and the firm also foregoes
discounts offered by its suppliers by extending the time until it pays invoices.

By offering the discount to customers for early payment, the firm is shortening its receivables
period, but also giving away some money in form of discount. By waiting to pay its suppliers,
the firm is extending its payables period, but the net effect is to spend more money than is
necessary to resolve open invoices. A question to be asked: Is the firm earning more by
holding its money over the period between when the discount is forgone and the total invoice
from the supplier come due, than it is incuring in the form of the implicit interest charge by
paying later? Or is there some cases which at a persent time calls for the retention of cash for
as long as possible.