308-Hedge Fund, etf, mutual fundaxy.pptx

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1. Understanding Exchange-Traded Funds (ETFs) An ETF is an exchange-traded fund because it’s traded on an exchange just like stocks. It has a share price that allows it to be easily bought and sold on exchanges throughout the trading , and it can be sold short. An ETF is a type of fund that holds multiple underlying assets, rather than only one like a stock does. Because there are multiple assets within an ETF, they can be a popular choice for diversification . ETFs can thus contain many types of investments, including stocks, commodities, bonds, or a mixture of investment types. An ETF can own hundreds or thousands of stocks across various industries, or it could be isolated to one particular industry or sector. Some funds focus on only U.S. offerings, while others have a global outlook . For example, banking-focused ETFs would contain stocks of various banks across the industry.

2. What Is a Hedge Fund? A hedge fund is a limited partnership of private investors whose money is managed by professional fund managers who use a wide range of strategies, including  leveraging or trading non-traditional assets, to earn above-average investment returns. Hedge fund investment is often considered a risky alternative investment choice and usually requires a high minimum investment or net worth , often targeting wealthy clients. Hedge funds use riskier strategies, leverage assets, and invest in debt and equity securities, commodities, currencies, real estate, and derivatives  such as options and futures. The appeal of many hedge funds lies in the reputation of their managers in the closed world of hedge fund investing.

3. Typical investors include institutional investors, such as pension funds, insurance companies, and wealthy individuals . Investments in hedge funds are considered illiquid as they often require investors to keep their money in the fund for at least one year, a time known as the  lock-up period.   Withdrawals may also only happen at certain intervals such as quarterly or bi-annually . Today, hedge funds employ a standard "2 and 20" fee system, a 2% management fee, and a 20% performance fee. The management fee is based on the net asset value of each investor's shares, so an investment of $1 million garners/stockpiles a $20,000 management f ee that year to cover the operations of the hedge and compensate the fund manager. The performance fee is commonly 20% of profits. If an investment of $1 million increases to $1.2 million in one year, $40,000 is the fee owed to the fund .

4. Hedge Fund vs. Mutual Fund Hedge funds differ from mutual funds and hedge funds are not as strictly regulated by the Securities and Exchange Commission (SEC) as mutual funds are. Mutual Funds  are a practical cost-efficient way to build a diversified portfolio  of stocks, bonds, or short-term investments and are available to the general public and average investor. Hedge funds can only accept money from accredited investors which includes individuals with an annual income that exceeds $200,000 or a net worth exceeding $1 million, excluding their primary residence. These investors are considered suitable to handle the potential risks that hedge funds are permitted to take.

5.   A hedge fund can invest in land, real estate, stocks, derivatives, and currencies while mutual funds use stocks or bonds as their instruments for long-term investment strategies. Unlike mutual funds where an investor can elect to sell shares at any time, hedge funds typically limit opportunities to redeem shares  and often impose a locked period of one year before shares can be cashed in. Hedge funds employ the 2% management fee and 20% performance fee structure. In 2021, the average expense ratio across all mutual funds and exchange-traded funds was 0.40% for the average investor.

6. What to Consider Before Investing As investors research to identify hedge funds that meet their investment goals, they often consider the fund or firm's size, the track record and longevity of the fund, the minimum investment required to participate, and the redemption terms of the fund. Investors should also do the following when deciding to invest in a hedge fund: Read the hedge fund’s documents and agreements which contain information about investing in the fund, the strategies of the fund, the location of the fund, and the risks anticipated by the investment. Understand the level of risk involved in the fund’s investment strategies and that they equate with personal investing goals, time horizons, and risk tolerance. 

7. Determine if the fund is using leverage or speculative investment techniques which will typically invest both the investors’ capital and the borrowed money to make investments. Evaluate potential conflicts of interest disclosed by hedge fund managers and research the background and reputation of the hedge fund managers. Understand how a fund’s assets are valued as hedge funds may invest in highly illiquid securities and valuations of fund assets will affect the fees that the manager charges. Understand how a fund's performance is determined and whether it reflects cash or assets received by the fund as opposed to the manager’s estimate of the change in the value. Understand any limitations to time restrictions imposed to redeem shares.

8. Examples of Hedge Funds As of 2022, the most notable hedge funds include: Elliot Management Corporation with a 55-year-long history and over $50 billion in assets under management (AUM). Its core holdings are in the energy sector. Bridgewater Associates is a global leader, with more than $235 billion in assets AUM, and a rate of return of 32% for the first half of 2022.

9. What are mutual funds? A mutual fund pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the MF are known as its portfolio. Investors buy shares in MFs. Each share represents an investor’s part of ownership in the fund and the income it generates. Why do people buy MFs? MFs are a popular choice among investors because of the following features: Professional Management.  The fund managers do the research and then select the securities and monitor their performance. Diversification or “Don’t put all your eggs in one basket.” MFs typically invest in a range of companies and industries. This helps to lower your risk. Affordability.   Most MFS set a relatively low amount for initial investment and subsequent purchases. Liquidity.  MFs investors can easily cash their shares at any time.

10. What types of mutual funds are there? Most MFs fall into 4 categories – money market funds, bond funds, stock funds, and target date funds. Money market funds have relatively low risks. By law, they can invest only in certain high-quality, short-term investments issued by U.S. corporations, and federal, state, and local governments. Bond funds  have higher risks than money market funds as they aim to produce higher returns. Stock funds  invest in corporate stocks. Some examples are: Growth funds focus on stocks that may not pay a regular dividend but have the potential for above-average financial gains/capital gain. Income funds invest in stocks that pay regular dividends. Index funds track a particular market index such as the Standard & Poor’s 500 Index (ETF) . Sector funds specialize in a particular industry segment. Target date funds hold a mix of stocks, bonds, and other investments. Target date funds, sometimes known as lifecycle funds, are designed for individuals with particular retirement dates in mind.