1 Ch 6 Funds.docx

1 Ch 6 Funds.docx - Ch 6 Mutual Funds and Hedge Funds 1...

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Ch 6 Mutual Funds and Hedge Funds 1. Background Mutual funds 互惠基金 and hedge funds 對沖基金 invest money on behalf of companies or individuals. Funds from different investors are pooled and fund managers do their best to choose investments to meet specified objectives. Mutual funds (or called unit trusts 單位信託基金 ) serve the needs of small investors, while hedge funds attract money from rich individuals or large investors (e.g. pension funds). A mutual fund has to explain its investment policies in a prospectus available to potential investors. Hedge funds are subject to fewer regulations than mutual funds; hence, they can use a wide range of trading strategies and are secretive about what they do. This chapter examines: 1
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(1) the description of the types of mutual funds, (2) the description of hedge funds, (3) how to charge investors, and (4) how successful in producing good returns for investors. 2. Mutual Funds 互惠基金 The main attraction of mutual funds for small investors is the opportunities of diversification. Although diversification can improve an investor's risk- return trade-off (see Ch 1's Section 3), a small investor finds it difficult to hold enough stocks to be well diversified, and incurs high transaction costs (e.g. stamp duty 印花稅 ) to maintain a well-diversified portfolio either. A mutual fund provides a way through which the resources of many small investors are pooled, so that the benefits of diversification are realized at relatively low costs . Mutual funds have grown fast since 1940. A small investor simply buys a certain number of units in an open-end mutual fund or shares in a closed-end mutual fund. 2
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Three main types of mutual funds are: (1) Bond funds invest in fixed income securities. (2) Equity funds invest in stocks (the most popular). (3) Hybrid funds invest in bonds, stocks and other securities. 2.1 An open-end mutual fund 開放式基金 The number of outstanding units is not fixed (goes up when investors buy more units but goes down when they redeem units). Banks or insurance companies offer this fund to investors. The NAV (net asset value 資 產 淨 值 ) of this fund is determined at 4.00 pm each day: Fund managers evaluate the total market value of the fund and then divide it by the number of outstanding units. An investor can buy or sell any number of units at any time in a business day. The buying or selling price per unit is the next-determined NAV (= the unit price used for all buy or sell orders placed within the previous 24 hours ). 3
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Example An investor who buys one unit at 2.00 pm in a business day pays the NAV determined at 4.00 pm in that day. 2.2 An index fund 指數基金 It is the kind of open-end mutual fund designed to track a particular equity index (e.g. the S&P 500 標準普爾 500 合指數 ).
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  • Fall '19

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