Ag217 Tutorial 8

Front 1

What is thedifference between open-ended and closed-ended funds?

Back 1

With an open-endedfund (more commonly known as mutual funds), the fund itself will issueshares or redeem shares if an investor wishes to sell.

With a closed-endedfund, the number of shares is fixed and never changes. So you must transactshares with different investors.

Front 2

Are there anycircumstances where you would invest in one over the other?

Back 2

The choice between the two largely depends onwhat you want to invest in. For investments in mainstream, liquid markets likedeveloped economy large-cap equities, an established large open-end fund isprobably the better choice in most cases. It avoids the fluctuatingpremiums/discounts of closed-end funds.

In contrast, closed-end funds arelikely to be the better choice for underlying assets such as real estate,frontier markets, small caps and low-grade credit, since these are moreilliquid assets.

To explain further, when markets becomestressed, such as during the financial crisis, some assets may become illiquid,while others remain easy to sell. When this happens with an open-end fund, thefirst investors to exit will tend to receive cash obtained by the manager fromsales of the more liquid assets. While this is good for these faster-movinginvestors, slower-moving investors are left with units in an imbalanced fundthat holds mainly illiquid assets that cannot be readily sold and for which thetheoretical valuation may fall further than the more balanced portfolioexisting before the stress began. Funds are structured with this in mind.

Front 3

1. Give an overviewof the different types of mutual funds that exist today. 2.How do mutual fundsdiffer to exchange-traded funds?

1. C-G-I-S-I-S-S

2. P-S-M

Back 3

-Capitalappreciation.

-Growth.

-Income.

-Company size.

-International.

-Sector.

-Sociallyresponsible.

Mutual funds and ETFs differ in their pricing(once versus several times per day), how shares are bought and sold (on anexchange versus directly with the fund), and minimum investment criteria

Front 4

Give an overviewof the different types of bond funds that exist today.

M-C-T-C

Back 4

Bond fundsdiffer by:

-Maturity.

-Credit quality

-Type of bond

-Country.

Front 5

What is theclosed-end fund discount? What are the explanations put forward for thispuzzle?

P-R-S

Back 5

Closed-end funddiscount refers to the observation that closed-end funds sell at a discount tothe NAV.

Explanations:

-Poor managerial performance– managers performing poorly.

Restrictedstocks – investors want to buy at a favourable price for holding an illiquidasset

-Investorsentiment – investors underestimate returns during market stress and bid mutualfund prices down.

Front 6

What do we meanwhen we say that hedge funds are “anything that charges 2 and 20”?

Back 6

Annual managementfee of 2% and a profit sharing fee of 20%.

Front 7

How do hedgefund strategies differ to those of mutual funds?

R-T

Back 7

Generally, a lotmore risk seeking and they are not very transparent about their strategy.

Front 8

If you alreadyhold a diversified portfolio of stocks and bonds, is it a good idea to investin a hedge fund? Explain.

A-P

Back 8

Probably not,given that the portfolio is already diversified. However, if the investoradopted a passive strategy and wanted to capitalise on current market eventsthen there could be a role for investing in a hedge fund.

Front 9

Which of thefollowing hedge fund types is most likely to have a return that is closest torisk-free?a) Market-neutralhedge fundb) An event-drivenhedge fundc) A long/shorthedge fund

O-C-B

Back 9

Themarket-neutral hedge fund. These funds try to take offsetting positions (e.g.long and short in the same asset) to achieve no correlation to market movementsand delivering a beta of 0.

Front 10

In your opinion,are hedge funds ethical?

Back 10

Ethics ofprofiting from others’ misery. But they can lead to more efficient pricediscovery. Undoubtedly, hedge funds do have a role in financial markets.

Front 11

Assume that youwork for a global macro hedge fund who is looking to capitalise on theuncertainty created by Britain’s in-out referendum on the European Union. Whattrade(s) would you recommend?

L-S-B

Back 11

Potentialtrades:

Long incompanies with foreign income exposure.

Short companieswith high exposure to UK domestic market.

Bull and bearcase to be made for gilts.· Short GBP, shortEUR, long USD.

If you thinkBrexit would be beneficial for the UK then asset price declines may represent afundamental undervaluation; but if you think Brexit would be negative for theUK than asset price declines probably represent a fair valuation.

Front 12

Give an overviewof the fund management industry in the UK. How do you think the city of Glasgowcan compete with global players such as London and attract more financial servicescompanies to the city?

U-F-B-T-I

Back 12

-Promotion of ScottishUniversities throughout the UK - Strathclyde, Glasgow, and Edinburgh inparticular all offer excellent finance and business courses. This skilledworkforce needs to be promoted.

-Keep foreign studentsand attract a mix of foreign and local students to the country. · Take steps to stopbrain drain.

-Competitive businessrates. The Scottish government has launched a review of this.· Competitive officerents.

-Competitive taxsystem generally, including the treatment of foreign branchesand subsidiaries.

-Development ofinfrastructure and working with industry to promote greater connectivity tointernational markets.

-Cluster promotion.

Isthere a way that Glasgow could promote itself as specialists in a particularfield? E.g. management of Asian assets, Islamic finance, etc.

Front 13

Assume that a hedge fund as an initial capital of£2,100,000 and is analysing two stocks, A and B. Both are currently priced at£10, but the manager believes this represents an undervaluation for A and anovervaluation for B. At the end of the month stock A has increased in price to£12, and stock B has decreased in price to £8. A dividend of £1.50 was paid onA during the month, while no dividends were paid on B. If the fund has aninitial margin deposit of £100,000 and adopts a 120 long/20 short strategy,what is the net outcome from this trade? Assume that the interest rebate andthe liquidity buffer is 2% per annum, while the broker fee is 3% per annum

Back 13