Professional Documents
Culture Documents
Mutual Funds
Mutual Funds
Mutual Funds
The Mutual
Fund Industry
Chapter Preview
We study why mutual funds have become
so popular, the various types of mutual
funds, their regulation, and scandals in the
mutual fund industry. Topics include:
The Growth of Mutual Funds
Mutual Fund Structure
Investment Objective Classes
Fee Structure of Investment Funds
Copyright 2006 Pearson Addison-Wesley. All
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Mutual Funds
Mutual funds pool the resources of many
small investors by selling them shares and
using the proceeds to buy securities.
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Figure 21.2 Average Asset Allocation for All 401(k) Plan Balances
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$35,000,000
$15,000,000
$3,000,000
$53,000,000
-$800,000
$52,200,000
15 million
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Stock Funds
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Bond Funds
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Hedge Funds
A special type of mutual fund that received
considerable attention following the collapse of
Long Term Capital Management.
Different from typical mutual funds, as follows:
High minimum investment, averaging around $1 million
Long-term commitment of funds is required
High fees: typically 1% of assets plus 20% of profits
Highly levered
Little current regulation
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Hedge Funds
Hedge funds are often trying to take advantage of
unusual spreads between security prices
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Conflicts of Interest
in the Mutual Fund Industry
Investor confidence in the stability and
integrity of the mutual fund industry
is critical.
However, the usual problems of
asymmetric information and the principalagent problem arose, leading to abuses on
the part of fund management.
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Conflicts of Interest
in the Mutual Fund Industry
Mutual Fund Abuses
Late trading: allowing trades after 4:00 pm to
trade at todays 4:00 NAV instead of
tomorrows price. This is illegal under
SEC regulations.
Market timing: taking advantage of time zone
differences for determination of NAV. This is
not illegal under SEC rulings.
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Conflicts of Interest
in the Mutual Fund Industry
Government Response to Abuses
Require more independent directors
Hardening the 4:00 valuation rule: this addresses the
late trading problem, but not market timing.
Increased and enforces redemption fees: fees to
discourage market timing by additional fees for shortterm redemptions.
Increased transparency: hits operating practices,
directors, investment managers, compensation
arrangements with brokers, etc.
Copyright 2006 Pearson Addison-Wesley. All
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