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Chapter 17 - Mutual Funds and Hedge Funds

Chapter Seventeen

Mutual Funds and Hedge Funds

I. Chapter Outline1. Mutual Funds and Hedge Funds: Chapter Overview2. Size, Structure, and C!psitin " the Mutual Fund #ndustr$

a. Histrical %rends&. 'i""erent %$pes " Mutual Funds

(. Mutual Fund )eturns and Cstsa. Mutual Fund *rspectuses and O&+ectives&. #nvestr )eturns "r! Mutual Fund Ownershipc. Mutual Fund Csts

. Mutual Fund alance Sheets and )ecent %rendsa. ng-%er! Mutual Funds

&. Mne$ Mar/et Mutual Funds0. Mutual Fund )egulatin. Mutual Fund l&al #ssues7. Hedge Funds

a. %$pes " Hedge Funds&. Fees n Hedge Fundsc. O""shre Hedge Fundsd. )egulatin " Hedge Funds

II. Learning Goals

1. 34a!ine hw and wh$ the !utual "und industr$ has grwn thrugh ti!e.

2. 'istinguish &etween lng-ter! !utual "unds and !ne$ !ar/et !utual "unds.(. 5nderstand what is cntained in a !utual "und prspectus.. Calculate the net asset value " and the return n a !utual "und invest!ent.0. #denti"$ the !ain regulatrs " !utual "unds.. 34a!ine trends in the dllar value " !utual "unds utstanding gl&all$.7. 6nw what a hedge "und is.

III. Chapter in Perspective

Mutual "unds pl investrs "unds and invest in !ne$ r capital !ar/et instru!ents,and s!eti!es derivatives. %he$ allw investrs t gain diversi"icatin and pr"essinal!anage!ent accrding t speci"ic pu&lished &+ectives at lw cst. Mne$ !ar/et

!utual "unds prvide den!inatin inter!ediatin t investrs as !st !ne$ !ar/etsecurities have den!inatins that are t large "r individual savers t a""rd. %he$ als""er higher rates " return than &an/ accunts. )ecall "r! Chapter 1 that investrsdesire t place s!e " their "unds in less li8uid, higher earning accunts t "und lngter! gals. ng ter! !utual "unds prvide investrs a lw cst !eans t gain e4psuret high return !ar/ets while eli!inating !st diversi"ia&le ris/. %he strng stc/ !ar/et" the 199s &rught recrd increases in &th the level " !utual "und assets and thenu!&ers " "unds. %he prer stc/ !ar/et per"r!ance " the earl$ 2s hwever,

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slwed and even reversed the trend " !utual "und grwth. Fr! the end " 21 t ;une22, industr$ assets declined a&ut

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prvide ther services t investrs as well including:

Free e4change " invest!ent &etween a !utual "und c!pan$s "unds

=ut!atic peridic invest!ent and reinvest!ent " "und distri&utins

Chec/ writing privileges n certain "unds t$pe @MMMF and &nd "undsA

=ut!atic withdrawals

)ecrd /eeping "r ta4 purpses

(. Si)e* Structure* and Co"position o! the Mutual Fund Industry

a. Historical #rends

=lthugh !utual "unds have &een arund since the 192s, as recentl$ as 197 there werenl$ ( "unds with " !utual "und assets 21A /uity !unds: *ri!aril$ hld c!!n and pre"erred stc/ @.>A

0ond !unds: *ri!aril$ hld "i4ed inc!e securities with !aturities ver 1 $ear

@19.?>A

Hy-rid !unds: lends " e8uit$ and &nd "unds. @0.?>A

#a, e,e"pt !unds: Funds that specialize in investing in ta4 e4e!pt securities

Inde, !undsE Funds that atte!pt t !i!ic the per"r!ance " a given inde4,

&ecause the$ d nt activel$ engage in ti!ing and stc/ selectin the$ generall$have lwer e4pense ratis than ther "unds.2%hese have nw grwn t a&ut 20>

2 %he average e4pense rati "r anguard "unds in 27 was .19>, cnsidera&l$ &elw e4pense ratis "r!anaged prt"lis.

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" lng ter! "unds. #n 21 there were (09 inde4 "unds !anaging a&ut

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3. Mutual Fund 4eturns and Costs

a. Mutual Fund Prospectuses and O-5ectives

Mutual "unds are re8uired t pu&lish the speci"ic &+ectives " the "und in the prospectus@a "r!al su!!ar$ " a prpsed invest!entA. B investr shuld invest in a "undwithut care"ull$ reading the prspectus. %he prspectus will cntain histrical return

in"r!atin, usuall$ "r 1 $ear, ( $ear and 0 $ear perids and perhaps lnger. %heprspectus !ust als shw histrical "ees and the e""ect " thse "ees n a giveninvest!ent ver ti!e.

%eaching %ip: %he reader shuld &e aware that a prspectus, while cntaining necessar$in"r!atin "r the investr, is &asicall$ a !ar/eting tl. Fr instance, ne rarel$ "inds!uch a&ut ris+in a prspectus and the "unds will "ten tut the perid that !a/es thereturns appear the &est.

%eaching %ip: Fund &+ectives and apprpriate gals @!a+r categries nl$A: Seewww.!rningstar.c!,www.ici.rg,and Mal/eil, .,A Random Walk Down Wall Street,

.. Brtn *ress 199. Much " the "llwing !aterial is drawn "r! Mal/eils &/.

Fund %$pe6ggressive Gro'th

Fund O&+ective

C!!n stc/ "und, stressing pic/ing stc/s with unrecgnized grwth, usuall$ s!all

"ir!s r sectr "unds, high turnver, higher &eta r stc/s, little r n dividend inc!e.

%hese "unds have su&stantial ptential "r capital lss. Sectr "unds, s!all and !id capgrwth "unds !a$ "it int this categr$. %here are als s!e &ear !ar/et "unds thatinvest cunter-c$clicall$.

C!pati&le #nvestr al@sA

ng ti!e hrizn, willing and a&le t ta/e su&stantial ris/ in hpe " high returns, higha&ilit$ t re!ain in the !ar/ets regardless " ecn!ic cnditins.

Gro'th

Fund O&+ective

C!!n stc/ "und, stressing pic/ing s!e stc/s with unrecgnized grwth, and s!estc/s that pa$ !derate t su&stantial dividends, !derate t high turnver, higher &etastc/s, nl$ !derate dividend inc!e. %hese "unds als have su&stantial ptential "rcapital lss. arge cap grwth "unds are an e4a!ple in this categr$


ng ti!e hrizn, willing and a&le t ta/e su&stantial ris/ in hpe " high returns, high

a&ilit$ t re!ain in the !ar/ets regardless " ecn!ic cnditins.

Gro'th 7 Inco"e

Fund O&+ective

asicall$ a c!!n stc/ "und, pr&a&l$ with s!e &nds, stressing pic/ing s!estc/s with unrecgnized grwth, and s!e sta&le stc/s that pa$ su&stantial dividendsas well as cupn &earing &nds, !derate turnver, "und &eta at r near the I!ar/etI,

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generall$ higher dividend inc!e. %here is a su&stantial ptential "r capital lss inadverse ecn!ic cnditins. =ll size &lend and value "unds !a$ "it int this categr$.


%hse with a !derate t lng ti!e hrizn, willing and a&le t ta/e ris/ in hpe "higher returns, !derate a&ilit$ t re!ain in the !ar/ets regardless " ecn!ic

cnditins.

Inde,

Fund O&+ective

'uplicate per"r!ance " s!e inde4 such as the SG*0. i/e all stc/ "unds there issu&stantial chance " capital lss during adverse ecn!ic cnditins. %hese "unds havever$ lw turnver and lw e4penses. %here are inde4 "unds that !i!ic per"r!ance "the entire !ar/et while s!e "unds are designed t give returns si!ilar t an industr$ r!ar/et sectr, including di""erent size sectrs such as s!all caps, !id caps, etc. %hereare als varius internatinal inde4 "unds availa&le nw.


#nvestrs with a !derate t lng ti!e hrizn that are willing and a&le t ta/e ris/s inreturn "r $ields c!para&le t the I!ar/etI. #nvestrs are "ten thse wh &elieve ine""icient !ar/ets with sta$ing pwer t ride ut tugh ecn!ic ti!es.

0alanced

Fund O&+ective

=ppr4i!atel$ e8ual prprtins " stc/s and &nds althugh this varies with !ar/etcnditinsE the$ are usuall$ ver$ well diversi"ied. %he stc/s are usuall$ J&lue-chipJ t$pewith esta&lished dividend recrds. nds are usuall$ high grade with su&stantialcupns, the "und "cus is t$picall$ @&ut nt alwa$sA n current inc!e. S!e !a$ havesu&stantial internatinal invest!ents "r diversi"icatin purpses. %he "unds &eta is

usuall$ &elw the I!ar/etI, with generall$ high dividend and interest inc!e. #nvestrs"ace !derate ptential "r capital lss in adverse ecn!ic cnditins. = special t$pe "&alanced "unds called %arget 'ate "unds have nw develped that are designed "rinvestrs wh will retire within the given target date. =s investrs age the$ nr!all$want t reduce the ris/ " their invest!ents. %hese "unds d this aut!aticall$ as thetarget date appraches. %here are currentl$ Bear %er! "unds with a 21 target date,#nter!ediate %er! "unds with a range " target dates " 210-229 and ng %er! withtarget dates " 2( and lnger.


%hse with a !derate ti!e hrizn, willing and a&le t ta/e !derate ris/ in return "rhigher current inc!e, and have s!e a&ilit$ t re!ain in the !ar/ets regardless "

ecn!ic cnditins.

Inco"e

Fund O&+ective

*ri!aril$ higher current $ield, "i4ed inc!e securities, !stl$ &nds. nds are usuall$high grade with su&stantial cupnsE the &+ective is usuall$ t generate !a4i!u!current inc!e. %he "und &eta is nr!all$ su&stantiall$ &elw the I!ar/etI, and the "undnr!all$ generates high interest inc!e. %here is s!e ptential "r capital lss in

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adverse ecn!ic cnditins. #n"latin ris/ can &e severe and ta4es can signi"icantl$erde returns.


%hse with a !derate ti!e hrizn, willing and a&le t ta/e !derate ris/ in return "rhigher current inc!e, investrs are "ten thse wh need the invest!ent inc!e "r

living e4penses.

Money Mar+et

Fund O&+ective

wer $ielding "i4ed inc!e securities. Mst "und invest!ents will have a !aturit$ lessthan r e8ual t 1 $ear. %he "und &+ective is t prvide a rate " return superir t &an/invest!ents while !ini!izing chance " capital lss. %here is little ris/ " capital lss.


#nvestrs with a shrt t !derate ti!e hrizn, wh are unwilling r una&le t ta/e!uch ris/ in return "r !derate t lw $ields. #nvestrs are "ten thse wh need theinvest!ent inc!e "r living e4penses and cannt a""rd t ris/ capital lsses, r the

"unds !a$ &e used as a Kpar/ing space "r a shrt ti!e. %here are ptentiall$ largepprtunit$ lsses n these invest!ents i" held "r a lng ti!e perid.

%hese state!ents are generalities and !an$ variatins e4ist within a "und categr$. Frinstance, it is entirel$ pssi&le t "ind a grwth "und with greater ris/ than an aggressivegrwth "und. See Mrningstar "r !re speci"ic "und &+ective de"initins. rwth"unds have &een a!ng the !st ppular in recent $ears.

=&ut 01. !illin husehlds @(.9>A wned !utual "unds in 21. %he !edian ageinvestr is 0 althugh tw-thirds are &etween ages (0 and . %he$ are e!pl$ed,!arried and have a wr/ing spuse. =&ut ?> " "und hlders invest in s!e e8uities.

%he !edian invest!ent is

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"und K&r/e the &uc/ and had its share value "all &elw the standard " dividend and interest inc!e earned.

(. Capital gains distri&utins: )ecgnized capital gain increases due t the "unds selling" shares result in capital gains distri&utins. Funds are nr!all$ re8uired tdistri&ute at least 9> " realized capital gains.

'istri&utins are nr!all$ paid 8uarterl$ r annuall$.

%eaching %ip: #nvestrs will nt nr!all$ wish t &u$ int a "und right &e"re adistri&utin date. 'ing s will create ta4a&le inc!e "r! the distri&utins in thecurrent ta4 $ear. %he ta4a&le inc!e will &e ""set &$ a capital lss n the !utual "undshares, &ut the lss will &e unrecgnized until the individual sells the !utual "und shares.

%eaching %ip: #nvestrs shuld chse a "und with a turnver rate that !eets their gals,particularl$ i" the "und is nt held in a ta4 sheltered vehicle. High turnver "unds

generate !re ta4 lia&ilities each $ear.%a/ing 0.5(1 / annual turnover ratio)will givethe average hlding perid " securities within the "und. %urnver ratis are reprted &$Mrningstar and in the "und prspectus.

Closed endinvest"ent co"panieshave a "i4ed nu!&er " shares utstanding and dnt issue new shares r redee! shares "r! investrs. %hese shares are traded li/e stc/sand !a$ &e e4change listed. Clsed end "unds are either created as a clsed endc!pan$, as !st unit invest!ent trusts are, r the$ are "r!er !utual "unds that havedecided t clse t new investrs, such as Fidelit$s Magellan Fund. 5nit trusts, such asthe ppular real estate invest"ent trusts 14/I#s2, !a$ &e levered and can have e4tre!erates " return. 5nli/e !utual "und shares, clsed end "und shares !a$ trade at apre!iu! r a discunt t the B= " the "und. 3!pirical evidence has presented n

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cnvincing reasn wh$ "und discunts and pre!iu!s e4ist.

c. Mutual Fund Costs

Csts t a !utual "und investr @nt all "unds charge each t$pe " "eeA.

Load charge: %he lad is usuall$ a "rnt end lad, !eaning that this "ee is paid up

"rnt when the investr &u$s shares in the "und. #t is cnceptuall$ e8uivalent t a&r/ers c!!issin. %he !a4i!u! size lad allwed is ?.0>, althugh ver$ "ew"unds @!stl$ sectr r internatinal "undsA charge lads ver 0> tda$ &ecause "the c!petitiveness " the !utual "und industr$. #n "act, the !a+rit$ " "unds nwcharge n lad at all and the a!unt " dllars invested in lad "unds is lees thaninvested in s called Kn lad "unds. $o load !undsare directl$ !ar/eted,cnse8uentl$, the investr !ust g l/ing "r the!. r/ers sell lad "unds.Statistical per"r!ance " lad "unds is n &etter than the per"r!ance " n lad"undsE thus, investrs wh use lad "unds are pa$ing "r the advice " a &r/er as twhat t$pe " "und is apprpriate "r the!, &ut there is n ther return "r pa$ing thelad charge. S!e "unds charge &ac/ end lads instead " r in additin t "rnt end

lads. #n a &ac/ end lad the investr pa$s the lad when the shares are sld. %his is&etter than a "rnt end lad &ecause in a "rnt end lad $u earn nthing n thea!unt that ges t the &r/er whereas that !ne$ culd &e invested "r the hldingperid n a &ac/ end lad. #" a "und has !ultiple class shares @and ver hal" nw dA,the di""erent classes usuall$ represent di""erent !ethds " assessing the lad charge.S!e "unds charge hlding perid cntingent &ac/ end lads such that the lad isreduced i" the investr leaves their !ne$ with the "und "r lnger perids. 5suall$a"ter "ive $ears the lad is zer.Fr e4a!pleClass 6shares pa$ a "rnt end lad, and usuall$ incur a s!all 12&-1 "ee @see &elwAClass 0shares have n "rnt lad, &ut incur a &ac/ end lad and a larger 12&-1 "eeE

a"ter a set perid " ti!e such as -? $ears, the Class shares cnvert t Class = andthus incur the s!aller 12&-1 "ee.Class Cshares have n "rnt lad, and a &ac/ end lad is incurred nl$ i" shares aresld within a set nu!&er " $ears. %hese shares d nt nr!all$ cnvert t Class =and carr$ the "ull 12&-1 "ee "r the entire ti!e the$ are held.

%eaching %ip: %his !eans investrs "ace trade""s in deter!ining which class " "undshare t purchase. %he &est chice will depend n the ter"s o! the !und, the e,pectedti"e the investor 'ill stay in the !undand in s!e cases the a"ount o! "oneyinvested. Br!all$, Class = shares entail the highest cst &ecause less !ne$ isinvested with the "rnt lad deductin. %he real cst " a "rnt end lad is actuall$ wrse

than the stated lad. #" $u have

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di""erent !utual "unds spnsrs withut incurring an$ lad charges. r/ers arec!pensated &$ a prtin " the 12&-1 "ees.

%eaching %ip: %he =!erican =ssciatin " #ndividual #nvestrs @==##A pu&lishes a lwcst &/ annuall$ titled, N%he #ndividual #nvestrs uide t w ad Mutual Funds.

w lad is > r less. = searcha&le data&ase is als availa&le. %he &est surce "!utual "und data is pr&a&l$ Mrningstar, which prvides its *rincipia prduct at areasna&le cst.

%(-8% !ees: %he hidden lad. Fr s!e reasn the S3C allws "unds t assess what iscalled a 12&-1 "ee in lieu " @r in additin tA a "rnt end lad. ith a "rnt end lad theinvestr purchasing the "und shares pa$s all " the c!!issin. #n a 12&-1 plan the ladis assessed n all the "unds sharehlders. %his !a/es the lad a!unt @>A appears!aller. Mar/eting and servicing csts can &e n !re than .20> per $ear and!anage!ent "ees are li!ited t .70> per $earE thus the !a4i!u! 12&-1 charge is 1>per $ear. = n-lad "und can charge a 12&-1 "ee " n !re than .20> and still advertise

as a n lad "und. =s nted the !a4i!u! "r lad "unds is 1>. %he assessed "ee !a$var$ with the class " shares chsen as discussed a&ve.

Operating /,penses: Fund !anagers e4penses and pr"its are generated &$ the

perating e4penses that are assessed t the "und.

%eaching %ip: = Jwell !anagedJ "und pr&a&l$ shuld have an expense ratio" less than2.

%tal csts " investing in !utual "unds declined in the 199s and csts are li/el$ tcntinue t drp. Since 19? "und csts had drpped "r! 2.2> t 1.(0> in 199?.

%eaching %ip: %he e""ect " lads and "ees n returns%his $ear $u invested . hat is $ur return net " lads and e4pensesP

=!unt initiall$ invested Q

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decade.

Mutual "und 8utes are si!ilar t stc/ 8utes. %he Wall Street !ournal "r instanceprvides B=, invest!ent &+ective, e4pense rati, and lad charges i" an$. Fund returnsare als ran/ed within the invest!ent &+ective. )e"er t the WS!8ute sheet in the te4t.

Bte that the S; ran/ings d nt include an$ !easure " ris/. Mrningstar ran/ingsinclude an ad+ust!ent "r "und ris/ and thus are pr&a&l$ &etter ran/ings t use.Bevertheless, !st studies shw that ran/ings are nt predictive " "uture per"r!ance scare !ust &e used in interpreting an$ ran/ing sche!e.

9. Mutual Fund 0alance Sheets and 4ecent #rends

a. Long8#er" Funds#n 21 e8uit$ invest!ents were 0.2> " ttal "unds invested in lng ter! "unds.#nvest!ents in crprate and "reign &nds c!prised 17.>, and 5.S. gvern!ent andagenc$ securities !ade up 1.7>., while !unicipal invest!ents were 7.>. %hepercentages " de&t and e8uit$ hwever can var$ widel$ ver di""erent !ar/et cnditins.

Mar/et ti!ing "unds @als called asset allcatin "undsA are designed t var$ the a!unt" !ne$ in the di""erent asset classes accrding t "recasts " per"r!ance. 'uring the"inancial crisis assets "ell "r! A wuld &e ter!ed Knging sales "ees, and wuld have t &eter!inated nce an investr had paid the e8uivalent t the lad charged n classes "!utual "und shares that pa$ a "rnt end lad. #" "r e4a!ple the shares with a "rnt endlad paid a0> lad charge, the !anage!ent "ee prtin " the 12&-1 assessed n ther"und classes !ust &e ter!inated when the investrs ttal pa$!ent is e8uivalent t a 0>"rnt end lad. =s " this writing, this is nl$ a prpsal.

-. Money Mar+et Funds

#n 21 MMMFs held 1.> in pen !ar/et paper, 29.> in %reasuries and agencies,12.7> in !unicipals and 1.?> in reps. Mne$ !ar/et "unds !aintain a cnstant B=" in 27 t (0.0> in 2?.

:. Mutual Fund 4egulation

%he S3C is the pri!ar$ regulatr " !utual "unds. %he !a+r acts regulating !utual"unds include the &an/ing and securities acts " 19(( and 19( and the Invest"entCo"pany 6ct o! %;9

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trading a&uses and the Mar+et 4e!or" 6ct o! %;;

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in"r!atin disclsure and reprting wrngding t the &ard.. Sharehlder reprts !ust disclser all "ees sharehlders paid as well as

!anage!ents discussin " "und per"r!ance ver the perid. #nvestrs nw geta reprt shwing hw !uch the$ paid, hw !uch the &r/er @i" an$A was paid,and hw the "und c!pares with industr$ averages "r "ees, lads and &r/erage

c!!issins.0. *)O*OS3' &$ S3C, &ut nt apprved: NHard clsing n &u$Lsell rderprcessing as " : *M 3S% dail$. %he industr$ is "ighting this ne &ecausethe$ clai! &r/ers wuld have t have the rders &$ as earl$ as 1: a! in theda$. @%his is a pr&le! that culd easil$ &e slved &$ technlg$ hwever.A

#n March 29 the S3C increased disclsure re8uire!ents "r !utual "unds. %he "unds!ust nw ""er a straight"rward e4planatin " /e$ "und in"r!atin at the &eginning "a prspectus prvided t investrs as a result " a ptential invest!ent rder. %he "ullprspectus will still &e availa&le n the we&.

%eaching %ip: Mrningstar is !aintaining a "und watch list "r "unds under investigatinwith prescriptins "r investrs, such as N*rceed with cautin, N'nt send new!ne$, and NCnsider selling. %his in"r!atin is availa&le at www.!rningstar.c!.

%he scandals dnt see! t have had a lasting deleterius e""ect n the industr$. Surve$s&$ the #nvest!ent C!pan$ #nstitute @#C#A indicate that 70> " peple have a "avra&leperceptin " the industr$, althugh this perceptin is driven heavil$ &$ current !utual"und per"r!ance.

>. Mutual Fund Glo-al Issues

'uring the 199s !utual "unds were the "asting grwing "inancial institutin in the5nited States. rwth slwed r declined in !st !a+r cuntries " the wrld in 21,reversing a decade lng trend, &ut pic/ed up again as the ecn!ic grwth i!prved inthe !id-2s nl$ t decline again during the crisis. Hwever, in the late 2s grwthin nn-5.S. invest!ents utpaced grwth in 5.S. "unds. %tal assets " nn-5.S. !utual"unds were

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leverage and are e4psed t signi"icant levels " !ar/et ris/. S!e !a$ use acntrarian strateg$ and unli/e !utual "unds, !a$ engage in e4tensive shrt selling.

Mar+et neutral or value oriented !unds!a$ tr$ t "und securities that are

te!praril$ !ispriced such as a stc/ r &nd " a "ir! in an ut " "avr industr$ rin "inancial distress. Funds " "unds, !ulti-strateg$ "unds and specialt$ "unds l/ing

"r hstile ta/evers, Os etc, !a$ "it int this categr$ and the$ usuall$ have lessris/ e4psure than directinal "unds.

4is+ avoidance !unds"it the traditinal interpretatin " the ter! Khedge "und.

%hese "unds ta/e levered &ets n lwer ris/ r even pure ar&itrage situatins ratherthan engaging in ris/$ ar&itrage. %he$ !a$ &u$ stc/ and ""set the ris/ &$ shrting acnverti&le &nd n the sa!e "ir!.

-. Fess on Hedge Funds

Hedge "unds charge !anage!ent "ees that are si!ilar t standard annual !utual "unde4penses. %hese "ees t$picall$ run &etween 1.0> and 2.>. Hwever, hedge "undscharge a per"r!ance "ee as well i" certain cnditins are !et. *er"r!ance "ees average

2> " the gain in the "und assets. #n rder t assess the per"r!ance "ee the "und willhave t !eet a hurdle rate @!ini!u! rate " returnA and "ten !ust pass a Khigh-water!ar/ test. %he high-water !ar/ !eans the per"r!ance "ee cannt &e assessed unlessthe "unds B= is at an all ti!e high at the ti!e " assess!ent.

c. O!!shore Hedge Funds%he Ca$!an #slands are the lcatin " a&ut 70> " hedge "unds. %his is &ecause""shre "unds are nt ta4ed n distri&utins " pr"its and are nt su&+ect t 5.S. estateta4es n "und shares. O""shre "unds trade !re perhaps &ecause the$ dnt "ace capitalgains ta4es, the$ engage in less windw dressing and dnt engage in as !uch Kherd&ehavir as nshre "unds.

Hedge Fund Per!or"ance

Hedge "unds did ver$ well in the 199s and did well thrughut !uch " the 2s untilthe su&pri!e crisis hit in 27 when tw ear Stearns hedge "unds invlved in !rtgage&ac/ed securities 8uic/l$ "ailed. 5SL'illn )ead Capital clsed hedge "unds in 27,and in earl$ 2? Citigrup &arred investr withdrawals "r! ne " its hedge "unds.%he "inancial crisis reduced the a!unt " assets in hedge "unds, althugh a "ew "undsdid well during the crisis. %he t$pical hedge "und had negative returns " 10.7> in 2?,with a&ut 70> " "unds lsing !ne$ that $ear. 3ven s !an$ "unds utper"r!ed theinde4es in the sa!e ti!e perid. =lthugh returns were "ar &etter in 29 @in the 2>rangeAE the "unds underper"r!ed the SG* 0 ver that ti!e perid. Fund rede!ptins

"llwed a si!ilar pattern as "r !utual "unds.

%he cllapse " the tw ear Stearns hedge "unds led t investr lsses "

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sales " assets and wrd 8uic/l$ gt ut that ear was in tru&le. %his in turn led tadditinal sales " su&pri!e securities which e4acer&ated the pr&le!s at ear eventuall$leading t the assisted &u$ut as ear 8uic/l$ ran ut " capital.

ernard Mad"" #nvest!ent Securities was the "und run &$ "r!er B=S'=D chair!an

ernie Mad"".0

Mad"" ran an ld "ashined *nzi sche!e, clai!ing t have

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http:LLwww.!rningstar.c! )ated &$ arrns as the nu!&er ne we&site "rin"r!atin a&ut the !utual "und industr$.

VII. Student Learning 6ctivities

1. t http:LLwww.!rningstar.c! and &tain the reprt n a large "und "$ur chice. hat is the "unds strateg$ and hw has it per"r!ed ver the last ( and0 $earsP hat is the "unds star ratingP hat are the tp "ive hldings " the "undP

2. O&tain the NMutual Funds "r 'u!!ies &/ &$ 3ric %$sn. hat are the!a+r reasns "r investing in !utual "undsP hat is changing in the !utual "und&usinessP

(. Fr an$ speci"ic !utual "und, where can $u "ind its lowest8uarterl$ return@its wrst three-!nth peridA during the past 1 $earsP hat are the ta4 cnse8uences

" e4changing shares "r! ne "und t anther within the sa!e "und "a!il$P Mutual"unds can &e purchased directl$ "r! the "und c!pan$ r indirectl$ thrugh antherpart$ @"r e4a!ple, thrugh a &r/er, "inancial planner, r retire!ent planA. hatprtin " sales " stc/ and &nd "unds is !ade directl$ t the investrP *lease cite$ur surces.

. =t the #nvest!ent C!pan$ #nstitute we&site &tain the reprt titledNFre8uentl$ =s/ed Duestins =&ut %a4atin "r Mutual Funds. Hw are !utual"und hldings ta4edP 'es the investrs hlding perid !atterP Hw des "undturnver a""ect an investrs lia&ilit$P

0. 5sing the latest Fact&/ "und at the #nvest!ent C!pan$ #nstitute we&site,ran/ the "llwing t$pes " "und &$ ttal assets in the !st recent ti!e perid:=ggressive rwth, rwth, rwth and #nc!e, alanced, =sset =llcatin, nd"unds and Mne$ Mar/et Mutual Funds. 34plain the !a+r di""erences &etween eacht$pe " "und.

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