Chapter Seventeen

Mutual Funds and

Hedge Funds

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Mutual Funds and Hedge Funds

 Mutual
MutualFundsFunds(MFs)
(MFs)andandHedge
HedgeFundsFunds(HFs)(HFs)arearefinancial
financial
institutions
institutions(FIs)
(FIs)that
thatpool
poolthe
thefinancial
financialresources
resourcesof of
individuals
individualsandandcompanies
companiesandandinvest
investthose
thoseresources
resourcesin in
portfolios
portfoliosof ofassets
assets
 The
Thefirst
firstMF
MFwas
wasestablished
establishedininBoston
Bostonin in1924
1924
 By
By1970,
1970,360360MFs
MFsheld
heldabout
about$50$50billion
billionininassets
assets
 Money
Moneymarket
marketmutual
mutualfunds
funds(MMMFs)
(MMMFs)were wereintroduced
introducedin in
1970
1970
 Tax-exempt
Tax-exemptMMMFs MMMFswere wereintroduced
introducedin in1979
1979
 By
By2010,
2010,more
morethan
than7,567
7,567MFs
MFsheldheldjust
justover
over$11
$11trillion
trillioninin
assets
assets

17-2
Mutual Funds

 Cash
Cashflows
flowsinto
intoMFs
MFsare
arehighly
highlycorrelated
correlatedwith
withthe
thereturn
returnon
on
stock
stockmarkets
markets
 Growth
Growthhas
hasalso
alsoresulted
resultedfrom
fromthe
therise
risein
inretirement
retirementfunds
funds
under
undermanagement
managementby byMFs
MFs
 MFs
MFsmanaged
managed~~25%
25%of
ofretirement
retirementfund
fundassets
assetsinin2010
2010
 MFs
MFsare
arethe
thesecond
secondmost
mostimportant
importantgroup
groupofofFIs
FIsas
as
measured
measuredby byasset
assetsize;
size;second
secondonly
onlyto
tocommercial
commercialbanks
banks
 Banks’
Banks’share
shareofofall
allMF
MFassets
assetswas
was8%8%in in2010
2010
 Insurance
Insurancecompanies
companiesmanaged
managed7% 7%ofofMF
MFindustry
industryassets
assetsin
in
2010
2010

17-3
Money Market Mutual
Funds Money Flows

17-4
Primary Reserve Money Fund

 In
InSeptember
September2008,2008,Primary
PrimaryReserve
ReserveFund--a
Fund--amoney
moneymarket
market
mutual
mutualfund--‘broke
fund--‘brokethethebuck’
buck’and
andhad
hadits
itsshare
sharevalue
valuefall
fall
below
belowthe
thestandard
standard$1 $1due
duetotolosses
losseson
on$785
$785million
millionof
of
commercial
commercialpaper
paperissued
issuedbybyLehman
Lehmanbrothers
brothers
 This
Thisled
ledtotocontagion
contagionandandaarun
runon
onmoney
moneyfunds
fundswith
withover
over
$200
$200billion
billionoutflows
outflowsover
overthe
thenext
nextfew
fewdays
days
 The
TheTreasury
Treasuryguaranteed
guaranteedpayments
paymentson onmoney
moneyfunds
fundsfor
forone
one
year
yearto
tostop
stopthe
theruns.
runs.The
Theinsurance
insuranceran
ranout
outSeptember
September19, 19,
2009.
2009.

17-5
Mutual Funds

 The
The barriers
barriers to
to entry
entry in
in the
the MF
MF industry
industry are
are low
low
 the
thelargest
largestMFMFsponsors
sponsorshavehavenot
notincreased
increasedtheir
theirmarket
market
share
sharerecently
recently
 the largest 25 MF companies managed 76% of industry
the largest 25 MF companies managed 76% of industry
assets
assetsinin1990
1990
 the largest 25 MF companies managed 75% of industry
the largest 25 MF companies managed 75% of industry
assets
assetsinin2010,
2010,about
aboutthe
thesame
same
 the
thecomposition
compositionof ofthe
thetop
top25
25firms
firmsin
inthe
theindustry
industryhas
has
changed
changed
 seven of the largest 25 firms in 2010 were not among the
seven of the largest 25 firms in 2010 were not among the
top
top2525inin1990
1990

17-6
Mutual Funds

 The
TheMF
MFindustry
industryhas
hastwo
twosectors
sectors
 short-term funds invest in securities with original
short-term funds invest in securities with original
maturities
maturitiesof
ofless
lessthan
thanone
oneyear
year
 money
moneymarket
marketmutual
mutualfunds
funds
 tax-exempt
tax-exemptmoney
moneymarket
marketmutual
mutualfunds
funds
 long-term
long-termfunds
fundsinvest
investin
inportfolios
portfoliosof
ofsecurities
securitieswith
with
original
originalmaturities
maturitiesof
ofmore
morethan
thanone
oneyear
year
 equity funds consist of common and preferred stock
equity funds consist of common and preferred stock
 bond funds consist of fixed-income capital market debt
bond funds consist of fixed-income capital market debt
securities
securities
 hybrid funds consist of both stock and bond securities
hybrid funds consist of both stock and bond securities

17-7
Mutual Funds

 Approximately
Approximately25%
25%of
oflong-term
long-termfunds
fundsare
areindex
indexfunds
funds
 index
indexfunds
fundsare
arefunds
fundsininwhich
whichmanagers
managersbuy buysecurities
securitiesinin
proportions
proportionssimilar
similarto
tothose
thoseincluded
includedininaaspecified
specifiedmajor
majorindex
index
 index
indexfunds
fundsinvolve
involvelittle
littleresearch
researchor ormanagement,
management,whichwhichresults
results
ininlower
lowermanagement
managementfees feesand
andhigher
higherreturns
returnsthan
thanactively
actively
managed
managedfunds
funds
 Exchange
Exchangetraded
tradedfunds
funds(ETFs)
(ETFs)are
arealso
alsodesigned
designedto
to
replicate
replicatemarket
marketindexes
indexes
 traded
tradedononexchanges
exchangesatatprices
pricesdetermined
determinedby bythe
themarket
market
 management
managementfeesfeesare
arelower
lowerthan
thanactively
activelytraded
tradedfunds
funds
 unlike
unlikeindex
indexfunds,
funds,ETFs
ETFscan
canbebetraded
tradedduring
duringthetheday,
day,sold
sold
short,
short,and
andpurchased
purchasedononmargin
margin

17-8
Mutual Funds

 Money
Moneymarket
marketmutual
mutualfunds
funds(MMMFs)
(MMMFs)provide
providean
an
alternative
alternative investment to interest-bearing depositsat
investment to interest-bearing deposits at
commercial
commercialbanks
banks
 bank deposits are relatively less risky, because they are
bank deposits are relatively less risky, because they are
FDIC
FDICinsured,
insured,and
andgenerally
generallyoffer
offerlower
lowerreturns
returnsthan
than
MMMFs
MMMFs
 Households
Householdsown ownthe
themajority
majorityofofMFs
MFs
 owned 59.8% of long-term funds in 2010
owned 59.8% of long-term funds in 2010
 owned 40.2% of short-term funds in 2010
owned 40.2% of short-term funds in 2010
 43.9% of all U.S. households owned MFs in 2010—which
43.9% of all U.S. households owned MFs in 2010—which
represents
represents~51.6
~51.6million
millionhouseholds
households

17-9
Mutual Funds

 MF
MFmanagers
managersmustmustspecify
specifytheir
theirfund’s
fund’sinvestment
investmentobjectives
objectives
in
inaaprospectus
prospectus(a (aformal
formalsummary
summaryof ofaaproposed
proposed
investment),
investment),which
whichisismade
madeavailable
availableto topotential
potentialinvestors
investors
 holds lists of the securities invested in by the funds
holds lists of the securities invested in by the funds
 in 1998 the Securities and Exchange Commission (SEC)
in 1998 the Securities and Exchange Commission (SEC)
mandated
mandatedthatthatprospectuses
prospectusesmust mustbe bewritten
writteninin“plain
“plain
English”
English”instead
insteadofofoverly
overlylegal
legallanguage
language(i.e.,
(i.e.,legalese)
legalese)

17-10
Mutual Funds

 Mutual
Mutualfunds
fundsarearerequired
requiredto topublish
publishthe
thespecific
specificobjectives
objectivesof
of
the
thefund
fundininthe
theprospectus
prospectus
 No
Noinvestor
investorshould
shouldinvest
investin inaafund
fundwithout
withoutcarefully
carefullyreading
reading
the
theprospectus
prospectus
 The
Theprospectus
prospectuswillwillcontain
containhistorical
historicalreturn
returninformation,
information,
usually
usuallyfor for1-year,
1-year,3-year
3-yearand and5-year
5-yearperiods
periodsand
andperhaps
perhaps
longer
longer
 The
Theprospectus
prospectusmustmustalso
alsoshow
showhistorical
historicalfees
feesand
andthe
theeffect
effect
of
ofthose
thosefeesfeesononaagiven
giveninvestment
investmentoverovertime
time
 Little
Littleinformation
informationon onrisk
riskisisusually
usuallyprovided
provided

17-11
Types of Mutual Funds

17-12
Largest Mutual Funds in Assets
Held (2010)

17-13
Mutual Funds

 Investor
Investorreturns
returnsfrom
fromMF
MFownership
ownershipreflect
reflectthree
three
components
components
 income
incomeandanddividends
dividendsononportfolio
portfolioassets
assets
 capital
capitalgains
gainson
onassets
assetsbought
boughtand
andsold
soldat
athigher
higherprices
prices
 capital
capitalappreciation
appreciationon
onassets
assetsheld
heldininthe
thefund
fund
 MF
MFassets
assetsare
aremarked
markedto
tomarket
marketdaily
daily
 prices
pricesare
areadjusted
adjusteddaily
dailyto
toreflect
reflectchanges
changesininthe
thecurrent
currentmarket
market
prices of the portfolio’s assets
prices of the portfolio’s assets
 Then
Thennet
netasset
assetvalue
value(NAV)
(NAV)ofofaaMF
MFshare
shareisisequal
equaltotothe
the
market
marketvalue
valueof
ofthe
theassets
assetsin
inthe
theMF
MFportfolio
portfolioless
lessliabilities
liabilities
divided
dividedby
bythe
thenumber
numberofofshares
sharesoutstanding
outstanding

17-14
 Types of Mutual Funds
 An open-end MF is a fund where the numbers of shares
outstanding fluctuates daily with the amount of share
redemptions and new purchases. The shares’ supply is not
fixed. Investors can buy and sell shares from and to the mutual
fund company. Thus the demand for shares determines the
number of shares outstanding and the market value of the
underlying securities held in the fund divided by the n# of
shareholders outstanding determines the NAV of shares
 A closed-end investment company is a specialized
investment company that has a fixed supply of outstanding
shares, but invests in the securities and assets of other firms.
Investors can buy and sell the company’s shares on a stock
exchange.
 A real estate investment trust is a closed-end investment
company that specializes in investing in mortgages, property, or
real estate company shares 17-15
Mutual Funds

 MFs
MFscharge
chargeinvestors
investorsfees
feesfor
forthe
theservices
servicesthey
theyprovide
provide
 sales
salesloads
loads
 12b-1
12b-1fees
feesare
arefees
feesrelated
relatedto
tothe
thedistribution
distributioncosts
costsof
ofMF
MF
shares
shares
 cannot exceed 1% of average annual net assets for load
cannot exceed 1% of average annual net assets for load
funds
funds
 cannot exceed 0.25% of average annual net assets for no-
cannot exceed 0.25% of average annual net assets for no-
load
loadfunds
funds
 MFs
MFsmaymayoffer
offerdifferent
differentshare
shareclasses
classeswith
withdifferent
different
combinations
combinationsof ofloads
loads
 AAload
loadfund
fundisisan
anMF
MFwith
withananup-front
up-frontsales
salesor
orcommission
commission
charge
chargethat
thatthe
theinvestor
investormust
mustpay
pay
 AAno-load
no-loadfund
fundisisan
anMF
MFthat
thatdoes
doesnot
notcharge
chargeup-front
up-frontsales
sales
or
or commission charges on the sale of mutual fund sharesto
commission charges on the sale of mutual fund shares to
investors
investors

17-16
Mutual Funds

 In
In2010
2010average
averagefees
feesand
andexpenses
expensespaid
paidby
bymutual
mutualfund
fund
investors were 0.99% on stock funds and 0.75% on bond
investors were 0.99% on stock funds and 0.75% on bond
funds
funds
 These
Theseexpenses
expenseshave
havecontinued
continuedto
tofall
fallover
overthe
thelast
lastdecade
decade

17-17
The Effect of Costs on MF Returns

This
Thisyear
yearan aninvestor
investorplaced
placed$10,000
$10,000ininaamutual
mutualfund
fundwith
withaa6%6%load
load
(one
(onetime
timefee)
fee)and
andestimated
estimatedannual
annualexpenses
expensesof of1.35%.
1.35%. Fees
Feesare
are
charged
chargedagainst
againstaverage
averageassets
assetsfor
forthe
theyear.
year. The
Thefund’s
fund’sgross
grossreturn
return
isis11.5%.
11.5%. What
Whatwas wasthetheinvestor’s
investor’sfirst
firstyear
yearreturn
returnnet
netof
ofloads
loadsand
and
expenses?
expenses?
Amount = $10,000 – (0.06  $10,000) = $9,400
Amountinitially
initiallyinvested
invested
Amount = $9,400  1.115 = $10,481
Amountafter
aftergross
grossreturn
return
Average = ($10,481 + $9,400) / 2 = $9,940.50
Averageasset
assetvalue
valueforforyear
year
Fees = $9,940.50 * 0.0135 = $134.20
Fees
Ending = $10,481 - $134.20 = $10,346.80
Endingamount
amountafterafterfees
fees
Net = ($10,346.80 / $10,000) – 1 = 3.47%
Netrate
rateof ofreturn
return(first
(firstyear)
year)

17-18
Mutual Funds

 MFs
MFsare
areheavily
heavilyregulated
regulatedbecause
becausethey
theymanage
manageand
andinvest
invest
small
smallinvestor
investorsavings
savings
 The
TheSEC
SECisisthe
theprimary
primaryregulator
regulator
 The Securities Act of 1933
The Securities Act of 1933
 The Securities Exchange Act of 1934
The Securities Exchange Act of 1934
 The
TheInvestment
InvestmentAdvisers
AdvisersAct
Actand
andInvestment
InvestmentCompany
CompanyAct
Actof
of
1940
1940
 The
TheInsider
InsiderTrading
Tradingand
andSecurities
SecuritiesFraud
FraudEnforcement
EnforcementAct
Actof
of
1988
1988
 The
TheMarket
MarketReform
ReformAct
Actof
of1990
1990
 The
TheNational
NationalSecurities
SecuritiesMarket
MarketImprovement
ImprovementAct
Act(NSMIA)
(NSMIA)of
of
1996
1996

17-19
Mutual Funds

 Even
Even with
with heavy
heavy regulation,
regulation, investor
investor abuses
abuses still
still
occur
occur
 market
markettiming
timingisisshort-term
short-termtrading
tradingthat
thatprofits
profitsfrom
fromout-
out-
of-date
of-datevalues
valueson onthe
thesecurities
securitiesininthe
thefund’s
fund’sportfolio
portfolio
 late
latetrading
tradinginvolves
involvesbuys
buysand
andsells
sellslong
longafter
afterprices
priceshave
have
been set at 4:00 pm
been set at 4:00 pm E.T. E.T.
 directed
directedbrokerage
brokerageoccurs
occurswhen
whenbrokers
brokersimproperly
improperly
influence investors on their fund recommendations
influence investors on their fund recommendations
 improperly
improperlyassessed
assessedfees feesoccur
occurwhen
whenbrokers
brokerstrick
trick
customers
customers into thinking they are buying no-load fundsor
into thinking they are buying no-load funds or
fail
failto
toprovide
providediscounts
discountsproperly
properly

17-20
Global Issues

 During
Duringthethe1990s
1990smutual
mutualfunds
fundswere
werethe
thefasting
fastinggrowing
growing
financial institution in the United States
financial institution in the United States
 Growth
Growthslowed
slowedor ordeclined
declinedin inmost
mostmajor
majorcountries
countriesof ofthe
the
world
world in 2001, reversing a decade long trend, but pickedup
in 2001, reversing a decade long trend, but picked up
again
againasasthe
theeconomic
economicgrowth
growthimproved
improvedin inthe
themid-2000s,
mid-2000s,
only
onlyto
todecline
declineagain
againduring
duringthe
thecrisis
crisis
 In
Inthe
thelate
late2000s
2000sgrowth
growthin innon-U.S.
non-U.S.investments
investmentsoutpaced
outpaced
growth
growthin inU.S.
U.S.funds
funds
 Total
Totalassets
assetsof ofnon-U.S.
non-U.S.mutual
mutualfunds
fundswere
were$162.6
$162.6billion
billionin
in
1992
1992and,
and,as asofof2010,
2010,there
therewere
were$14.13
$14.13trillion
trillioninvested
investedin in
mutual
mutualfunds
fundsoutside
outsidethe
theU.S.
U.S.

17-21
Hedge Funds

 Hedge
Hedgefunds
funds(HFs)
(HFs)are
areinvestment
investmentpools
poolsthat
thatsolicit
solicitfunds
funds
from wealthy individuals and other investors (e.g.,
from wealthy individuals and other investors (e.g.,
commercial
commercialbanks)
banks)andandinvest
investthese
thesefunds
fundson
ontheir
theirbehalf
behalf
 similar
similarto
toMFs,
MFs,butbutsmaller
smallerfunds
fundsarearenot
notrequired
requiredto toregister
registerwith
with
the
theSEC
SEC
 subject
subjecttotoless
lessregulatory
regulatoryoversight
oversightthan
thanmutual
mutualfunds
fundsand
and
generally
generally can (and do) take significantly more risk thanMFs
can (and do) take significantly more risk than MFs
 do
donot
nothave
havetotopublicly
publiclydisclose
disclosetheir
theiractivities
activitiesto
tothird
thirdparties
parties
and thus offer a high degree of privacy
and thus offer a high degree of privacy
 HFs
HFsavoid
avoidregulation
regulationby
bylimiting
limitingthe
thenumber
numberofofinvestors
investorsto
to
less
lessthan
than100
100and
andbybyrequiring
requiringinvestors
investorsto
tobe
be
“accredited”
“accredited”
 accredited
accreditedinvestors
investorshave
havenet
networth
worthover
over$1
$1million
millionor
orannual
annual
income over $200,000 if single (or $300,000 if married)
income over $200,000 if single (or $300,000 if married)

17-22
Hedge Funds

 HFs
HFsuse
usemore
moreaggressive
aggressivetrading
tradingstrategies
strategiesthan
thanMFs
MFssuch
such
as
asshort
shortselling,
selling,leverage,
leverage,program
programtrading,
trading,arbitrage,
arbitrage,and
andthe
the
use
useof
ofderivatives
derivatives
 Because
BecausenotnotallallHFs
HFsare
areregistered,
registered,industry
industryand
andfirm
firmdata
data
cannot
cannotbe
beaccurately
accuratelytracked
tracked
~~10,000
10,000HFs
HFsin inthe
theU.S.
U.S.in in2010
2010
~~$1.77
$1.77trillion
trillionininassets
assetsinin2010
2010
~~new
newasset
assetflows
flowstrack
trackmarket
marketperformance
performance

17-23
 Types of Hedge Funds
Hedge
Hedgefunds
fundsare
arehighly
highlyspecialized.
specialized.Depend
Dependon onprofessional
professional
management
managementto togain
gainprofit
profitby
bydeploying
deployingvarious
variousinvestment
investment
strategies
strategies
There
Therearearethree
threebasic
basictypes
typesof ofHFs:
HFs:
-Most
-Most risky
risky--arearemarket
marketdirectional-
directional-use
usetrading
tradingstrategies
strategies
seeking
seekinghigh
highreturns,
returns,asasin
inleverage
leverageand and derivatives.
derivatives. Their
Their
investments
investmentsare arebased
basedon onanticipating
anticipatingevents.
events.They
Theyareare
classified
classifiedbybytheir
theirobjectives,
objectives,like
likeaggressive
aggressivegrowth,
growth,
emerging
emergingmarkets,
markets,market
markettiming,
timing,andandshort-selling
short-selling
-Moderate
-Moderate risk
risk--are
aremarket
marketneutral
neutral(or(orvalue)
value)oriented-
oriented-have
have
moderate
moderateexposure
exposureto tomarket
marketriskriskby
byfavoring
favoringlonger-term
longer-term
investment
investmentstrategies
strategies
-Risk
-Risk avoidance
avoidance--take takeaamarket
marketneutral
neutralapproach
approachand andstrive
strive
for
formoderate,
moderate,consistent
consistentreturns
returnswithwithlow
lowrisk
risk
17-24
Hedge Funds

 Management
Managementfees feeson
onHFs
HFsare
arecomputed
computedas
asaapercent
percentof
of
assets under management and run between 1.5% and
assets under management and run between 1.5% and 2% 2%
 Performance
Performancefees feesgive
givefund
fundmanagers
managersaashare
shareof
ofany
any
positive returns earned
positive returns earned
 the
theaverage
averageisis20%,
20%,but
butperformance
performancefees
feesvary
varysubstantially
substantially
depending on the
depending on the HFHF
 aahurdle
hurdlerate
rateisisaabenchmark
benchmarkthat
thatmust
mustbe berealized
realizedbefore
beforeaa
performance
performancefeefeecan
canbe
beassessed
assessed
 aahigh-water
high-watermark
markisiswhen
whenaamanager
managerdoesdoesnot
notreceive
receiveaa
performance
performancefeefeeunless
unlessthe
thevalue
valueof
ofthe
thefund
fundexceeds
exceedsthethe
highest
highestNAV
NAVitithas
haspreviously
previouslyachieved
achieved
 Offshore
OffshoreHFs
HFsare
areattractive
attractiveto
toinvestors
investorsbecause
becausethey
they
provide
provideanonymity
anonymityand
andare
arenot
notsubject
subjectto
toU.S.
U.S.taxes
taxes

17-25
Hedge Funds

17-26
Hedge Funds

 HFs
HFsunder
under$100
$100million
millionin
inassets
assetsare
areexempt
exemptfrom
from
registration
registrationrequirements
requirementssetsetforth
forthby
bythe
theInvestment
Investment
Company
CompanyAct Actof
of1940
1940
 HFs
HFshave
haveless
lessthan
than100
100investors
investorseach,
each,accredited
accreditedinvestors,
investors,
and are sold only as private placements
and are sold only as private placements
 HFs
HFsare
areprohibited
prohibitedfrom
fromabusive
abusive(i.e.,
(i.e.,illegal)
illegal)trading
tradingpractices
practices
 The
TheDodd-Frank
Dodd-Frankbill
billrequires
requiresthat
thathedge
hedgefundsfundswith
withmore
morethan
than
$100 million register with the SEC under the Investment
$100 million register with the SEC under the Investment
Advisors
AdvisorsAct
Act

17-27
Hedge Funds

 Fund
Fundadvisors
advisorsmust
mustnow
nowreport
reportfinancial
financialinformation
informationon
onthe
the
funds
funds they manage to the FSOC to help limit systemic riskin
they manage to the FSOC to help limit systemic risk in
the
theeconomy
economy
 The
TheFederal
FederalReserve
Reservecan
canalso
alsoexercise
exerciseoversight
oversightofoffunds
funds
deemed
deemedlarge
largeenough
enoughororinterconnected
interconnectedenough
enoughto topresent
presentaa
systemic
systemicrisk
risk

17-28
Hedge Funds Performance

 The
Thefinancial
financialcrisis
crisisreduced
reducedthe theamount
amountof ofassets
assetsin inhedge
hedge
funds
funds because of losses, although a few funds did wellduring
because of losses, although a few funds did well during
the
thecrisis
crisis
 The
Thetypical
typicalhedge
hedgefundfundhadhadnegative
negativereturns
returnsof
of15.7%
15.7%in in
2008,
2008,with
withabout
about75%75%of offunds
fundslosing
losingmoney
moneythat
thatyear
year
 Even
Evenso,so,many
manyfunds
fundsoutperformed
outperformedthe theindexes
indexesin inthe
thesame
same
time
timeperiod.
period. Although
Althoughreturns
returnswere
werefarfarbetter
betterinin2009
2009(in (inthe
the
20%
20%range),
range),the
thefunds
fundsunderperformed
underperformedthe theS&P
S&P500 500over
over
that
thattime
timeperiod
period
 Fund
Fundredemptions
redemptionsfollowed
followedaasimilar
similarpattern
patternduring
duringthethecrisis
crisis
as
asmutual
mutualfunds
fundsflows
flows

17-29
High Profile Hedge Funds
Problems
 The
Thecollapse
collapseofofthe
thetwo
twoBear
BearStearns
Stearnshedge
hedgefunds
fundsledledto
to
investor
investorlosses
lossesof
of$1.6
$1.6billion
billionand
andled
ledto
tothe
thebankruptcy
bankruptcyof ofthe
the
company
company
 Bernard
BernardMadoff
MadoffInvestment
InvestmentSecurities
Securitiesrun
runby
byformer
former
NASDAQ
NASDAQchairman
chairmanBernie
BernieMadoff
Madoffran
ranaa$65
$65billion
billionPonzi
Ponzi
scheme
scheme
 In
InOctober
October2009
2009aalarge
largehedge
hedgefund,
fund,Galleon
GalleonGroup
GroupLLC,LLC,
was
wasclosed
closedduedueto
toan
aninsider
insidertrading
tradingscandal
scandal

17-30