are often open only to institutional and accredited investors generally people

Are often open only to institutional and accredited

This preview shows page 17 - 18 out of 86 pages.

are often open only to institutional and accredited investors, generally people with a net worth of more than $1 million or annual household incomes of more than $200,000. And while seen as a clandestine force by the average American, hedge funds account for $1.8 trillion dollars coursing through the financial markets. At the sector’s peak—in 2007, right before the econ- omy fell ill—total assets under management at hedge funds were $2.7 trillion. In addition to a management fee based on a percent- age of assets managed, fund managers receive enormous incentive compensation based on the positive returns of the fund. A fund manager typically receives a man- agement fee of 1 to 2 percent of assets along with 20 percent of overall profits. This arrangement is called one and 20 in the industry. But this will not remain the status quo for much longer. Hedge fund assets have his- torically been classified as capital gains for tax purposes, but in May 2010, the House of Representatives passed a bill to tax 75 percent of carried interest as ordinary income, and 25 percent as capital gains. The new clas- sification is projected to bring in $17 billion in tax rev- enues during the next ten years. Institutional Asset Management Institutional asset managers invest money on behalf of corporations, insurance companies, pension funds, endowments, and charitable foundations. Asset man- agers offer their clientele a picnic basket full of invest- ment goodies, including money market funds, equity investments, fixed-income products, 401(k) and 403(b) administration, and active and indexed funds. Pension and Retirement Fund Management Pension and retirement fund management is exactly what the name implies. Back in the good old days when workers didn’t have to fund their own retire- ment plans through 401(k)s and IRAs, employers used to set money aside for their employees’ retire- ment. (How times have changed!) Nevertheless, pen- sion funds still exist, although they too have fallen prey to the economic downturn of recent years, with many seeing zeroes disappear from financial statements. At the end of 2008, the top 100 largest pension plans in the United States were underfunded by $217 billion. Luckily, those funds have started to rebound in step with the improving markets, but pension fund assets remained significantly lower at the end of 2009 than they were in 2007. RETAIL BROKERAGES Retail brokerage firms allow individuals from all walks of life to ride the wild roller coaster that is the stock mar- ket. Retail brokerages make money primarily through commissions on the trades of their clients, though brokerage firms are trying to move their customers to fee-based management. The retail brokerage industry includes full-service brokers such as Merrill Lynch and Morgan Stanley, a number of discount and online bro- kers on the low end, and private-client services and pri- vate banking on the high end. In recent years, everyone has been trying to get a piece of each other’s action, and the lines between these groups have blurred—Merrill offers online trading, Fidelity Investments has a dis- count brokerage, and Bank of America offers retail asset
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