Market Transparency

As a result of that all, no one went to jail. Most of these actions were violations of civil laws, not criminal. The cases were settled, the Attorney General or SEC has struck deals with fraudulent companies and they have paid penalties and fines. Sure, some people have lost their jobs and could never work in the same industry again.
Nevertheless, people do not have to hurry up and change their investments. That can be a very wrong move. To benefit, you have to wait to learn more about your mutual funds and their activities. Many investors do not know exactly what to do with their shares and that is why mutual funds with their expert management are still the best choice.
Understanding Mutual Funds. There are some essential principles that can bring an intelligent investor to great distributions. One more characteristic feature of mutual funds is that they somehow protect the investor and increase the return without increasing the risk. People who want to put their money in some securities, should always keep in mind that only steady and timely research can help to add value and not to lose. Investment decisions should be effective and only transparency on the market can put them into effect.

Vanguard Group

John Bogle and the Largest Mutual Funds Organization.

John Bogle is considered one of the most influential and big-gun personalities in the stock market. Thanks to his contribution to investment history, most of people have changed the ways they were investing their money. His main idea was to decrease the costs of investing. In 1974 he founded the company named Vanguard Group which is the largest investment management company in the world. John Bogle has launched the very first index fund that enabled ordinary investors to put their money in. At the present time, this fund is the largest mutual fund in the world. This success traces traces its roots back to 1951, when John Bogle wrote his senior basis at Princeton University. The Princeton alumni has developed a unique corporate structure that replaced less efficient old one. John Bogle was leading the company that fired him in 1974 and he founded his own one – the Vanguard Group. And then this person saw a bright future for investment industry in making funds independent and keeping the costs of investing down. And then in 1975, the first market mutual fund started its operations. The first market mutual fund made a revolution in the industry: investors did not have to pay sales charges, management fees, and transaction costs. The first market mutual fund started a new era with small operating costs and high tax efficiency. The investors started to trust more in mutual funds. Since then, they have a pretty deep insight in what the mutual fund company is doing and what its investment strategy is like. This total fallacy in the middle of 1970s turned out to be the doctrine in 2000. The Vanguard Group has introduced the new environment at the market. Now many mutual funds has this investment strategy that John Bogle has once introduced: simple and time-tested, that can outperform and bring the biggest distributions. According to Bogle, the more simplicity in investing, the higher the level of profits. The importance of low costs is crucial.

Mutual Funds Gamble

Gambling or Calculation?

There is a huge number of differnt reasons why people want to invest their money and to undertake some risk. Some of them just want to make much of investment to add value to their assets, other people want to make their future more riskless and shielded, others want to pay for their homes and vehicles. And moreover, such a saying: nothing venture, nothing have almost does not work with mutual funds.
Sure, the financial crisis creates some wild swings at the stock market and at the present time it is difficult to convince investors in stability of whatever. Although, new researches show that many experienced investors stay invested in mutual funds. There is a number of mutual funds research companies that keep investors aware of the events that take place at the stock market. Strategic Insight is one of them. This company reports that mutual fund cash inflows keep on picking up and in 2007 the demand of investors for mutual funds reached a record high. Trim Tabs Investment Research Company publishes the same information and notes that investors progressively gravitated toward mutual funds during the recent ruptures in the credit markets.

Mutual Funds

What is Mutual Funds?

People should distinguish between three main types of investment companies. These organizations that focus on issuing in investing in securities divide into mutual funds, closed end funds and unit investment trust. Mutual funds are also known as open end organizations.
Mutual fund is an investment vehicle that lets many investors to pool the money. And then mutual fund enables these investors to have it jointly managed by an investment manager.
In general, the process of investing looks like this: a company recieves the money from investors and then it invests this money in some industry. An investment company deals with the money on the collective basis. Each investor is entitled to a "pro rata" share and participates in the profits and losses. Mutual fund distributes its income each year to avoid taxation. A distribution consists of capital gains, interest and dividend income. Distributions can be made monthly.

Fund of Funds

Fund of Funds are not perfect though, they come with their own unique drawbacks. The first to come to mind is the double layer of fees. When dealing with FoF, an investor must understand that the underlying funds charge a fee, as well as the Fund of Funds manager. This translates to “layers” of fees before the investor receives dollar one. Transparency issues are also important. Research such as the individual manager’s background and reputation, the nature of the investments that they are utilizing, and more are all issues a fund of fund manager must investigate. Therefore, you are relying on the FoF manager’s talent and expertise in choosing managers, when investing.

High Watermark

A "high water mark" is often applied to a performance fee calculation. This means that the manager does not receive performance fees unless the value of the fund exceeds the highest net asset value it has previously achieved. For example, if a fund were launched at a net asset value (NAV) per share of $100, which then rose to $130 in its first year, a performance fee would be payable on the $30 return for each share. If the next year it dropped to $120, no fee is payable. If in the third year the NAV per share rises to $143, a performance fee will be payable only on the extra $13 return from $130 to $143 rather than on the full return from $120 to $143. This measure is intended to link the manager's interests more closely to those of investors and to reduce the incentive for managers to seek volatile trades. However, this mechanism does not provide complete protection to investors: a manager who has lost money may simply decide to close the fund and start again with a clean slate assuming that he can persuade investors to trust him with their money. Some funds also specify a hurdle rate, which states that the fund will not charge a performance fee until its annualized performance exceeds a benchmark rate, such a fixed percentage, over some period. This links performance fees to the ability of the manager to do better than the investor would have done if he had put the money elsewhere. Funds which specify a soft hurdle rate charge a performance fee based on the entire annualized return. Funds which use a hard hurdle rate only charge a performance fee on returns above the hurdle rate.

Hedge Fund Regulations

Although the SEC is currently examining how it can address the Goldstein decision, commentators have stated that the SEC currently has neither the staff nor expertise to comprehensively monitor the estimated 8,000 U.S. and international hedge funds. One of the commissioners of the SEC has stated they are forming internal teams that will identify and evaluate irregular trading patterns or other phenomena that may threaten individual investors, the stability of the industry, or the financial world.

In February 2007, the President Bush's advisory group on Financial Markets rejected further regulation of hedge funds and said that the industry should instead follow voluntary guidelines.

Prime Brokerage

Prime Brokerage is the generic name for a bundled package of services offered by investment banks to hedge funds. The business advantage to a hedge fund for using a Prime Broker (PB) is that a PB provides a centralized securities clearing facility for the hedge fund. The result of having a centralized facility is it allows all the hedge fund's expenses and transactions to be more easily tracked. The Prime Broker benefits by earning fees ("spreads") on financing the client's long and short cash and security positions. The PB also charges, in many cases, fees for clearing and/or other services.
The following core services are typically bundled into the Prime Brokerage package:
• Global custody (including clearing, custody, and asset servicing)
• Securities lending – An exchange of stock or securities for some sort of collateral, usually cash equal or greater to the cost of the amount being borrowed.
• Financing - to facilitate leverage of client assets
• Customized Technology - provides hedge fund managers with portfolio reporting needed to effectively manage money
• Operational Support -prime brokers act as a hedge fund's primary operations contact with all other broker dealers.

Hedge Fund Structure

Many hedge funds are structured as master/feeder funds. In such a structure the investors will invest into a feeder fund which will in turn invest all of its assets into the master fund. The assets of the master fund will then be managed by the investment manager in the usual way. This allows several feeder funds (e.g. an offshore corporate fund, a US limited partnership and a unit trust) to invest into the same master fund, allowing an investment manager the benefit of managing the assets of a single entity while giving all investors the best possible tax treatment.

Hedge Fund Overview

Hedge Funds have become a fundamental aspect of the American stock market. From auspicious beginnings, they have grown into a force to be reckoned with. There currently exists over 200 hedge funds in the United States alone managing close to 1 trillion dollars! While they are a risky investment, the tantalizing rate of return continues to bring in investors. Will Hedge Funds rapid growth ever be clipped? It’s too hard to say but one thing is certain, as long as they remain largely unregulated, the veil of secrecy concerning their success and failures will remain largely unpierced.

US Regulation

Since Hedge Funds are unregulated, they can make investments without scrutiny by the SEC. Unlike mutual funds, they don’t have to report quarterly on their holdings. This means no one really knows what they are invested in. Their use of derivatives (complicated financial instruments, like options and futures contracts, that derive their value by reference to an underlying asset or index) means that, with little actual money invested, they have the capability to create large swings in the market. For example, many experts have said that the run-up in oil prices in July of 2006 was caused, in part, by hedge funds.

Hedge Fund Technology

A major reason for Hedge Fund’s increasing popularity and success is in large part due to the emergence of new technologies. What used to be an arduous search and investment process that was performed in person and through word of mouth has now been transformed into a seamless process easily monitored from the comfort of one’s home or office. The introduction and expansion of hedge fund database and analysis platforms, web sites, web meetings and teleconferencing, the process of marketing, finding, analyzing and monitoring hedge funds has completely revolutionized the industry. Not too long ago, finding hedge fund managers was a blend of skill, luck and networking. The primary method for discovering new hedge fund talent was word of mouth and extensive legwork, a common anecdote involved one company even going so far as to go door to door in New York’s financial district looking at nameplates to discover new talent.

How do Hedge Funds Work

Since they are unregulated, they can make investments without scrutiny by the SEC. Unlike mutual funds, they don’t have to report quarterly on their holdings. This means no one really knows what they are invested in. Their use of derivatives (complicated financial instruments, like options and futures contracts, that derive their value by reference to an underlying asset or index) means that, with little actual money invested, they have the capability to create large swings in the market. For example, many experts have said that the run-up in oil prices in July of 2006 was caused, in part, by hedge funds.

Offshore Hedge Funds

A lucrative reason for being offshore is that gains are either untaxed or very lightly taxed in the country where they were originated. While most investors set up offshore funds in the Caribbean and British Virgin Islands, a high number of new hedge funds are springing up all over the globe. This includes places like Hong Kong, Isle of Man, Switzerland, Luxembourg and many other places. Offshore financial centers are attractive to U.S. investors since they adhere to the privacy of their clients, and anonymous transactions can be made easily. Though the number of U.S. hedge funds far exceed the number of offshore funds, the money tied up in offshore funds is of far greater magnitude. Because voluntary information is scarce, it’s hard to estimate how much money is invested in these hedge funds but some have speculated it being over one trillion dollars!
Due to the nature of the U.S. tax and securities laws, it is easy to see why non-U.S. investors typically will not invest in hedge funds that are based in the United States. Many hedge fund managers do maintain both U.S. and non-U.S. components. The laws and regulations of the United States are directed not just to limiting the behavior of its citizens, but also to preventing money-laundering and other improper uses of offshore investment vehicles. Given the global complexity of the investment community, hedge fund managers want to keep their options open and attract investment money from both sides of the ocean.

Hedge Fund History

Hedge funds were created by Alfred Winslow Jones in 1949. Jones brought together two economic concepts to create what he considered a conservative investment scheme. He used leverage to buy more shares, and used short selling to avoid market risk. This approach has become a hallmark strategy of many hedge funds known today. He bought as many stocks as he sold, so regardless of whether the market was up or down, Alfred tried to maneuver himself into a good position. To Alfred this meant the crucial question, then, would not be the direction of the market but whether the manager had picked the right stocks to buy and sell. The fund avoided requirements of the Investment Company Act of 1940 by limiting itself to 99 investors in a limited partnership.
Alfred took a very proactive approach to this hedge fund. He chose to take 20 percent of profits as compensation and he charged no fee unless he made a profit. In summary, these three elements: a partnership structure where a percentage of profits is paid as compensation to the general partner/fund manager, a small number of limited partners as investors, and a variety of long and short positions, have now become the core elements of hedge funds today.