Access to greater number of customers leads to more capital these companies can

Access to greater number of customers leads to more

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Access to greater number of customers leads to more capital these companies can manage. by pooling more funds these businesses can grow, boost their economies of scale and provide greater liquidity for customers. 10/7/2019 6
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big market for financial advice and savings vehicles in which people want to put their DCP. mutual funds are likely to provide this vehicle. mutual funds market to individuals so this was natural for them. iii. Why are the mutual funds trouncing rivals? Made to work with individuals Specialized/Personalized services Individual investors can use mutual funds’ economies of scale to invest in securities markets (e.g. stock market), getting freedom to choose an integrated and efficient financial expert without their employers just choosing for them “Best of both worlds” D. Read “Hedge-fund regulation: At your own risk” (Item 10.5) and answer the following questions: i. What sorts of things can hedge-funds do that mutual funds cannot? Hedge funds are managed much more aggressively than mutual funds. o They can short sell stocks, can take positions on derivatives and use more leverage (hedge funds can borrow while mutual funds cannot). o This makes hedge funds much more risky than mutual fund (because of leverage). Hedge fund can make money even when market is falling because it can sell short, while mutual fund cannot. hedge fund is much more illiquid. can leverage, trade derivatives, short sell stocks because, these are risky investments that offer a higher yield. MF can’t do these things because of regulation ii. What are current restrictions on hedge funds? Hedge funds cannot o advertise or publicize freely. o They have a limit on the number and type of investors that each fund may have. o Can only raise capital in non-public offerings and from “accredited investors” or people with a minimum net worth. o many hedge funds in U.S. also regulated by commodity futures trading commission. small and exclusive market. SEC only wants people investing in HF if they are people SEC does not need to worry about protecting. iii. How can small investors invest in hedge funds? 10/7/2019 7
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Can invest in a “hedge fund like” mutual fund, or invest in funds that invest in hedge funds (funds of funds or retail hedge fund). people invest indirectly through managers of funds that invest in hedge funds. iii. Why is there increasing pressure to regulate? Concerns that there is fraud- o to achieve greater transparency and to protect unsophisticated investors. o Collapses of hedge funds (Gotham Partners, LTCM near-collapse, Lipper Convertibles, Beacon Hill Assets Management) have sparked concerns. o Hedge funds can have positions in various instruments that are very large, threatening to wreak havoc on the corresponding financial markets when a fund fails iv. What are likely consequences of regulation? Should hedge funds be regulated?
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