Slide MGT305 Slide04

Mutual Funds and Hedge
Funds
Chapter IV

Mutual Funds
• One of the attractions for small investors is
the diversification opportunities.
• There are various kinds of mutual funds
such as bonds funds, equity funds, hybrid
funds, and money market funds.
• An investor of mutual funds owns a certain
number of shares in the fund.

Mutual Funds
• The most common type of mutual funds is
open-ended as investors buy more shares
and vice versa.
• Shares can be sold and purchased anytime.
• Net asset value of the fund is calculated by
dividing the total value of each asset in the
fund by the total shares outstanding.

Mutual Funds
• Unlike open-ended mutual funds in which
the total number of shares outstanding
goes up as investors buy more shares or
vice versa, closed-end funds have a fixed
number of shares.

Index Fund
• Some funds are designed to track a
particular index such as S&P 500.
• It can be done through buying all the
shares in the index in amounts that reflect
their weight.
• Or investor could choose to a have a
smaller portfolio of representative shares.

Costs
• There are costs to owning mutual funds such

as management expenses, sales commissions,
accounting costs, transaction costs, etc.
• A front-end load is a fee charged to investors

at the first-time buy.
• Back-end load is a fee charged to investors

when selling shares.

Incentive of Hedge Fund
Managers

• The fee structure gives hedge fund managers to

make profits and take risks.
• Fund managers have a call option on the assets

of the fund which increases in value as volatility
rises.
• Managers could increase the option’s value by

taking risks that increase the funds’ volatility.