FUND MANAGEMENT

Contents
03 Hedge Funds
01 MUTUAL FUND

02 Exchange- 04 Venture Capital

Traded Funds Funds
1. MUTUAL FUND
• A mutual fund is an investment company that pools money from
and makes investments on behalf of fund shareholders who share
a common investment objective.
• The size of a mutual fund portfolio fluctuates as new money
comes in or investors redeem, and as the value of the securities
held by the fund rises or falls.
• Each mutual fund share represents ownership in all of the
securities in the fund portfolio.
• Capital gains and dividends or interest income from these
securities are paid out in proportion to the number of shares
investors own.
1. MUTUAL FUND
Advantages of investors:
• An investor buying shares of a mutual fund is buying an ownership interest in
all of the securities the fund owns.
• Professional management:
• The third advantage is that there are many types of mutual funds to choose
from.
• Issue both full and fractional shares. This allows investors to purchase shares
based on an even dollar investment.
• Open-funds: continuously issue new shares to or buy back shares from
investors.
• Mutual funds are liquid. Investors can redeem shares on any business day at
the net asset value. Many mutual funds also offer check-writing and online
payment privileges.
Mutual Fund Share Pricing and
Performance
• Net asset value (NAV) is the value of all the fund’s assets, minus
liabilities, divided by the total number of shares outstanding.
• For example: a mutual fund owns a portfolio of stocks worth $200
million at the end of the business day; its liabilities are $20 million;
and it has 2.4 million shares of the fund outstanding.

Offering price = NAV + applicable sales charge (front-end load)

Redemption price = NAV - redemption fee (back-end load)

Mutual Fund Taxation
• Mutual fund shareholders pay taxes on the dividends and capital
gains distributed by the fund. Investors who purchase shares right
before the ex-dividend date will be taxed on dividends or capital
gains that they have paid for. This occurs because a fund’s NAV
reflects the price of the securities it holds and any undistributed
dividends and capital gains
Mutual Fund Fees and Expens es

• Sales commissions.
• Fees charged by the fund’s investment adviser for managing
the fund (0.50 to 1.5% of assets under management).
• Transaction expenses: purchase, redemption, or exchange
fees (when the shareholder transfers money from one fund to
another within the same fund family)
Mutual Fund Selection and As s et Allocation
 Mutual Fund Selection and As s et Allocation
$100 Năm 1 Năm 2 • For example, suppose an investor has
a two-year investment horizon and is
Quỹ A 40% 0% faced with two types of funds in two
Quỹ B 0% 40% different asset classes. Fund A
provides a return of 40 percent in the
NĐT phân bổ 50/50 $120 $144 first year and 0 percent in the second
NĐT năm 1 đầu tư year. Fund B returns investors 0
100% vào Quỹ A, năm
percent and 40 percent during the
$140 $196 same two-year period. Thus,
2 đầu tư 100% vào quỹ investing in either Fund A or Fund B
B gives a total return of 40 percent. If
NĐT năm 1 đầu tư the investor allocates funds into
these two classes 50/50, the total
100% vào Quỹ B, năm return is 44 percent. An allocation
2 đầu tư 100% vào quỹ $100 $100 mix of 50/50 between Fund A and
A Fund B produces an additional return
of 4 percent.
2. Exchange-Traded Funds
• An exchange-traded fund (ETF) is an index fund or trust that is listed on an
exchange and can trade like a listed stock during trading hours.
• ETFs are mostly index-type.
• Advantages
• ETFs trade at intraday market prices, not the end of the day net asset
value for a typical mutual fund purchase or redemption.
• Ability to purchase on margin and sell short, even on a downtick
• Investors can also place stop loss and limit orders on ETFs.
• Tax efficiency is another advantage that ETFs offers. An ETF trade is
between investors
• provide a high degree of transparency
3. Hedge Funds

• A hedge fund is a private investment fund that employs investment

strategies involving various types of securities in various markets.
The defining characteristic of a hedge fund is that it can take both
long and short positions, and use leverage and derivatives.
• The fund is usually organized as a limited partnership. Investors in a
hedge fund make their investment by contributing capital and are
admitted as limited partners. The general partner (GP) has discretion
over investment strategies.
• The GP usually receives a fixed management fee of 1 to 2 percent of
the assets under management
• The incentive fee is usually 20 percent of profits in excess of a
chosen benchmark, although there are variations. The GP typically
has an investment in the fund.
3. Hedge Fund Structure
3. Hedge Fund Structure

The GP and LPs typically sign a partnership agreement. The

partnership agreement covers some of the following items:
• Investment objectives, strategies, and risk factors.
• When limited partners can invest, increase investments, and
withdraw from the fund.
• Details of management fee and incentive fees.
• Details of how full withdraws will be handled.
 3. Hedge Fund Structure
• The majority of U.S. hedge funds charge the standard “one-and-twenty,” 1
percent management fee and 20 percent incentive fees (The fee is usually
compared to a benchmark)
• Benchmark: previous year; high-water mark
Fund’s performance= NAV t year end-(NAV(t-1)yearend*(1+ profit rate))
Fund will not collect an incentive fee until a certain set rate of return has
been achieved.
High-water mark. If in a given performance fee period a fund loses
money, the investors will not be charged in later periods until the losses have
been recovered.
• Most funds require a minimum duration of investments into the funds, known
as the lockup period. The common lockup period is one year, even though a
three-year lockup is not unheard of. Prime brokerage is a suite of services
providing hedge fund
4. Venture Capital Funds
• Venture capitalists set up partnerships pooling funds from a variety of investors.
They seek out fledgling companies to invest in and work with these companies as
they expand and grow to become publicly traded companies.
• A private VC fund typically raises its capital from a limited number of
sophisticated investors in a private placement and has a life of about 10 to 12
years.
• VC firms receive income from two sources, the annual management fee and profit
allocation of the fund.
• The general partner (venture capitalist) typically receives 20 percent of the profits
as incentive fees. Many charge the incentive fees only if the rate of returns
exceeds the preset threshold.
• A VC fund passes through four stages: fundraising; investment; portfolio
companies grow; closing.
Characteristics of VC Investing
• Venture capitalist’s active involvement in sourcing portfolio company
candidates, negotiating and structuring the transaction, and monitoring the
portfolio company.
• VC investing is generally intended for a period of several years, typically
three to seven, with the expectation of high returns when the portfolio
company is successful and its securities soar in value.
• When a VC fund finances a new business startup or a growth company,
the company generally is privately held.
• VC funds will often take interest in a target only if the company has
superior management.
• Venture capitalists frequently seek board-level representation or control.
Frequently VC professionals and the management of the portfolio
company work in partnership.
Profit and Los s Allocations
• A fund’s profits (in excess of a preset threshold rate of return)
are generally split with 20-80 percent of net profits for general
partner and limited partners.
• For loss allocation, the practice is that losses are allocated in the
same manner as profits were previously allocated until such
losses have offset all prior allocated profits and the general
partner’s capital contribution. Then losses exceeding this amount
(excess losses) are allocated 100 percent to limited partners, but
subsequent profits are allocated to the limited partners until the
excess losses are recovered
• Management Fee: 1.5 to 2.5 percent of capital commitments per
year, payable to the general partner every quarter.
Investing Strategy

• Venture capital is high-risk, high-return investing.

2. INVESTMENT BANK REVENUES AND EXPENSES
2. INVESTMENT BANK REVENUES AND EXPENSES
Revenues
• For most investment banks today, investment banking
represents only a portion of their overall income.
• Asset management and other services account for a
significant portion of total net revenues for Morgan
Stanley.
• Goldman Sachs brought in a very large portion of new
revenues from institutional client service.
2. INVESTMENT BANK REVENUES AND EXPENSES
3. INVESTMENT BANK FINANCIAL PERFORMANCE
3. INVESTMENT BANK FINANCIAL PERFORMANCE
3. INVESTMENT BANK FINANCIAL PERFORMANCE
• Goldman Sachs
4. RISK MANAGEMENT
Market risk, credit risk, operating risk, reputation risk, legal risk, and funding risk.
Market risk: Rik of interest rate, foreign exchange, equity prices, and commodity
prices.
• Interest rate exposure results from maintaining market making and proprietary
positions and trading in interest rate-sensitive instruments.
• An IB is exposed to equity price risk by making markets in equity securities and
equity derivatives, and maintaining proprietary positions.
• Foreign exchange arises from making markets in foreign currencies and foreign
currency options and by maintaining foreign exchange positions.
• IB is exposed to commodity price risk in connection with trading in commodity-
related derivatives and physical commodities.
Ibs manage these market risks by diversifying exposures, controlling
position sizes, and establishing hedges in related securities or derivatives
4. RISK MANAGEMENT
Credit risk: Credit risk is the possible loss that occurs when a
counterparty or an issuer of securities or other instruments held b
To reduce credit risk, investment banks often:
• Establish limits for credit exposures and seek to enter into netting
agreements with counterparties that would permit them to offset
receivables and payables with such counterparties the firm fails to
meet its contractual obligations.
• Maintaining collateral and continually assessing the creditworthiness
of counterparties and issuers
Most securities companies have established credit management systems
that monitor current and potential credit exposure to individual
counterparties and, on an aggregate basis, to counterparties and their
affiliates.
4. RISK MANAGEMENT

Operating and Reputation Risk:

• Most firms manage operating risk by maintaining backup
facilities, using technology, employing experienced
personnel, and maintaining internal controls.
• To maintain a solid reputation, most investment banks stress
integrity and professionalism
4. RISK MANAGEMENT

Legal Risk Legal risk includes the risk that a firm might fail to
comply with applicable legal and regulatory requirements and the
risk that the counterparty’s obligations may be unenforceable.
To guard against these risks, an investment bank will establish
procedures addressing regulatory capital requirements, sales and
trading practices, new products, use and safekeeping of customer
securities, credit granting, collection activities, money laundering,
and record keeping
4. RISK MANAGEMENT

Funding Risk: Shortage of liquidity during the recent

financial crisis.
• To reduce funding risk, securities firms maintain a cash
position, borrow large sums in the debt markets, and secure
access to the repo and securities lending markets; in some
cases, they may sell securities and other assets.
• Accessing to the debt capital markets to finance their day-
to-day operations
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