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Type of Fund: Mutual funds and Hedge Fund What a Mutual Fund is? A mutual fund is a company that combines, or pools, investors' money and, generally, purchases stocks or bonds. Ideally, a fund's size and resultant efficiency, combined with experienced management, provide advantages for investors that include diversification, expert stock and bond selection, low costs, and convenience. In terms of legal structure, a mutual fund is a corporation that receives preferential tax treatment under the U.S. Internal Revenue Code. The assets of a mutual fund consist almost entirely of the securities it holds in its portfolio. The most common type of mutual fund, called an open-end fund, allows investors to buy and sell stock in it on an ongoing basis. The Mechanics The mutual fund issues shares of stock to investors in exchange for cash. It is interesting to note that funds do not issue a pre-determined amount of stock, as do most corporations; new shares are issued as each new investment is made. Investors thus become part-owners of the fund itself, and thereby the assets of the fund. The fund, in turn, uses investors' cash to purchase securities, such as stocks and bonds. As mentioned above, the primary assets of a fund are the securities it invests in. When you buy a mutual fund, you're actually buying shares of the fund. The price of a share at any time is called the fund's net asset value, or NAV. Invest $1,000 in a fund with an NAV of $118.74, and you will get 8.42 shares. The fund takes money and combines it with any other new investments and the money that's already invested with the fund. Altogether, those investments are the fund's assets. The fund invests its assets by buying stocks, bonds, or a combination of such securities. These stocks or bonds are often referred to as holdings, and all of a fund's holdings taken together are its portfolio. An investor or shareholder is a portion of that portfolio. Regardless of how much or how little invest, the shares are the portfolio in miniature. The Benefits Mutual funds offer a handful of benefits to investors. The primary advantages of mutual funds are diversification, professional management and convenience. By and large, most funds do achieve this basic mission. Over and above that, funds offer lower costs by virtue of their size; they may receive breaks on trading costs, and they certainly spread many internal costs over a large shareholder base, allowing for economies of scale. On the negative side, funds make tax planning difficult because the timing of taxable distributions is uncertain, and may be somewhat difficult to track in terms of what they actually are investing. In addition, fund companies may not disclose so-called non-substantial changes in the way the funds are managed to investors in a timely manner. 1. They don't demand large up-front investments. If have just $1,000 to invest, it will be difficult to assemble a varied group of stocks. If bought a mutual fund, it would get much more. It can buy some funds for as little as $50 per month, or invest a certain dollar amount each month or quarter. 2. They're easy to buy and sell. Buy mutual funds can via three ways: through financial advisors, directly from fund families, or via no-transaction fee networks, which are also called fund supermarkets. But no matter how buy funds, buy and sell shares are quite easily--often with just a phone call or mouse click. The exception: closed funds. Closed funds no longer accept new money, except, in some cases, from current shareholders. Investors who own closed funds can sell at any time, though. And when you sell shares of a fund, you get cash in return. 3. They're regulated. Mutual funds can't take money and head for some remote island somewhere. This security exists through regulation set by the Investment Company Act of 1940. After the stock-market madness of the two decades prior to 1940, which revealed big investors' tendencies to take advantage of small investors, the government stepped in. Apart from a small handful, mutual funds are not insured or guaranteed. It is not surprise lose money in a mutual fund, because a fund's value is nothing more than the value of its portfolio holdings. If the holdings lose value, so will the fund. 4. They're professionally managed. If planning to buy individual stocks and bonds, it is necessary to know how to read a cash-flow statement or calculate duration. Such knowledge is not required to invest in a mutual fund. While mutual fund investors should understand how the stock and bond markets work, need pay to fund managers to select securities. Mutual funds are not fairy-tale investments. Some funds are expensive, others are poor performing, and still others are tax nightmares. But overall, mutual funds are good investments for those who don't have the money, time, or interest necessary to compile a collection of securities on their own. Types of Mutual Funds 1. Stock Funds Stock funds are a diversified portfolio. Funds that invest in stock represent the largest category of mutual funds. Generally, the investment objective of this class of funds is long-term capital growth with some income. There are, however, many different types of equity funds because there are many different types of equities. 2. Bond/Income Funds Income funds are named appropriately: their purpose is to provide current income on a steady basis. When referring to mutual funds, the terms "fixed-income," "bond," and "income" are synonymous. These terms denote funds that invest primarily in government and corporate debt. While fund holdings may appreciate in value, the primary objective of these funds is to provide a steady cashflow to investors. As such, the audience for these funds consists of conservative investors and retirees. Bond funds are likely to pay higher returns than certificates of deposit and money market investments, but bond funds aren't without risk. Because there are many different types of bonds, bond funds can vary dramatically depending on where they invest. For example, a fund specializing in high-yield junk bonds is much more risky than a fund that invests in government securities; also, nearly all bond funds are subject to interest rate risk, which means that if rates go up the value of the fund goes down. Bond Fund iShares GS $ InvesTopTM Corporate Bond Fund iShares Lehman 1-3 Year Treasury Bond Fund iShares Lehman 20+ Year Treasury Bond Fund iShares Lehman 7-10 Year Treasury Bond Fund Advisor Barclays Global Fund Advisors Barclays Global Fund Advisors Barclays Global Fund Advisors Barclays Global Fund Advisors Credit A2 Aaa Aaa Aaa (Source: Moody’s: Managed Fund Ratings – Global) 3. Global/International Funds An international fund (or foreign fund) invests only outside home country. Global funds invest anywhere around the world, including home country. It's tough to classify these funds as either riskier or safer. On the one hand they tend to be more volatile and have unique country and/or political risks. But, as part of a wellbalanced portfolio, actually reduce risk by increasing diversification. Although the world's economies are becoming more inter-related, it is likely that another economy somewhere is outperforming the economy of home country. 4. Money Market Funds The money market consists of short-term debt instruments, mostly T-bills. This is a safe place to park money. A typical return is twice the amount would earn in a regular checking/savings account and a little less than the average certificate of deposit (CD). ABN AMRO Global Liquidity Funds PLC - ABN AMRO Euro Fund ABN-AMRO Asset Management Ltd. AAAm Money Market Fund ABN AMRO Global Liquidity Funds plc - ABN AMRO Sterling Fund ABN-AMRO Asset Management Ltd. AAAm Money Market Fund ABN AMRO Global Liquidity Funds plc - ABN AMRO US Dollar Fund ABN-AMRO Asset Management Ltd. AAAm Money Market Fund ABN AMRO Institutional Prime Money Market Fund ABN-AMRO Asset Management (U.S.A) Inc. AAAm Money Market Fund ABN AMRO Investor Money Market Fund ABN AMRO Asset Management (USA) LLC AAAm Money Market Fund ABN AMRO Treasury Money Market Fund ABN-AMRO Asset Management (U.S.A) Inc. AAAm Money Market Fund (Source: Stand & Poor’s – Fund Rating 2003) 5. Index Funds This type of mutual fund replicates the performance of a broad market index such as the S&P 500 or DJIA. An investor in an index fund figures that most managers can't beat the market. An index fund merely replicates the market return and benefits investors in the form of low fees. Example of Mutual Funds -- Fidelity Blue Chip Value Fund The Fidelity Blue Chip Value Fund will primarily invest in securities of well-known, established companies. Using a value investing discipline, the Fund will seek out companies that are undervalued relative to other companies in the large-capitalization category within the U.S. market. The fund focuses on domestic securities, and like most Fidelity mutual funds, also has the ability to buy foreign securities. -- Schroder MidCap Value Fund The Fund normally invests at least 65% of its assets in equity securities of mid-cap companies - companies with market capitalizations of between $1 billion and $10 billion. The Fund invests in a variety of equity securities, including common and preferred stocks, and warrants to purchase common and preferred stocks. The Fund normally invests primarily in equity securities Schroders believes to be undervalued. What Hedge Fund is? A hedge fund is a fund that can take both long and short positions, use arbitrage, buy and sell undervalued securities, trade options or bonds, and invest in almost any opportunity in any market where it foresees impressive gains at reduced risk. Hedge fund strategies vary enormously -- many hedge against downturns in the markets -especially important today with volatility and anticipation of corrections in overheated stock markets. The primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions. The Mechanics A Hedge Fund is a pool of capital for leveraging an investment portfolio that uses a private partnership as its structural format. This structural format is made up of a General Partner (investment manager), and Limited Partners (investors). The SEC (Securities Exchange Commission) forbids hedge funds from advertising to the general public, and only Accredited Investors are permitted to participate in the fund. The investment manager receives a fee for managing the fund, but only if it is productive. This is called an "incentive-based fee" or a "performance-based fee". Some funds also add a "watermark" or "hurdle" which the fund must outperform in order for the General Manager to earn his fee. The General Manager's fee is typically 1-2% of the total assets of the fund and he often has a large portion of his own assets in the fund. The General Manager may use any investment strategy or style he chooses, no matter how risky or "volatile", to manage the fund's assets for greater return. Although not all Hedge Funds actually "hedge', the name implies leveraging volatile securities against securities that will cushion the risk. In other words, to "hedge" is like playing two sides of the same coin so that if one side is losing, the other side wins and you're more likely to at least "break even" and losses are better absorbed. The General Manager's goal is to provide consistent fund performance regardless of the market's climate Benefits of Hedge Funds Many hedge fund strategies have the ability to generate positive returns in both rising and falling equity and bond markets. Inclusion of hedge funds in a balanced portfolio reduces overall portfolio risk and volatility and increases returns. Huge variety of hedge fund investment styles, many uncorrelated with each other, provides investors with a wide choice of hedge fund strategies to meet their investment objectives. Hedge funds have higher returns and lower overall risk than traditional investment funds. Hedge funds provide an ideal long-term investment solution, eliminating the need to correctly time entry and exit from markets. Adding hedge funds to an investment portfolio provides diversification not otherwise available in traditional investing. Hedge funds are extremely flexible in their investment options because they use financial instruments generally beyond the reach of mutual funds, which have SEC regulations and disclosure requirements that largely prevent them from using short selling, leverage, concentrated investments, and derivatives. Mutual Funds Vs Hedge Funds Mutual Funds A portfolio made up of numerous stocks and/or bonds Managed by a Fund Manager, whose fees are not dependant on whether the investors profit. The Fund Manager’s assets are less likely invested in the fund. Available to general public Are not limited in the number of investors who can invest in the fund. Are limited by the SEC in the securities or strategies used to be profitable. Since these funds are built from so many stocks, the bad ones often hold back the good ones Hedge Funds A private pool of investment capital organized into a limited partnership to invest in a portfolio made up of a variety of securities. Managed by a General Partner, whose fees are dependent on whether the investors profit. The General Partner’s assets are more likely to be a large percentage of the fund Available only to Accredited investors Are limited by the SEC to 499 investors (limited partners) who can invest in one fund. Are not limited in the securities or strategies used to be profitable. General Partners use hedging technique to minimize risk and maximize return so that a security that is underperforming is balanced by a higher performer