Mutual Funds andHedgeFundsChapter 4RiskManagementandFinanciallnstitutions3e,Chapter4,CopyrightJohnC.Hull2012
Mutual Funds and Hedge Funds Chapter 4 Risk Management and Financial Institutions 3e, Chapter 4, Copyright © John C. Hull 2012 1
Open-End MutualFundsInvestments in mutual funds have grown from$0.5 billion in 1940 to over $12 trillion in 2011Most common type of fund is an open-end fundThis means that the number of shares in thefund goes up as investors buy more shares anddown as they redeem sharesAll purchases and sales of shares are atthe4pm net asset value (NAV) of the fund2RiskManagementandFinancialInstitutions3e,Chapter4,CopyrightJohnC.Hull 2012
Open-End Mutual Funds ⚫ Investments in mutual funds have grown from $0.5 billion in 1940 to over $12 trillion in 2011 ⚫ Most common type of fund is an open-end fund ⚫ This means that the number of shares in the fund goes up as investors buy more shares and down as they redeem shares ⚫ All purchases and sales of shares are at the 4pm net asset value (NAV) of the fund Risk Management and Financial Institutions 3e, Chapter 4, Copyright © John C. Hull 2012 2
TaxTax is paid as though the investor owned themutual fund investmentsIf the mutual fund realizes capital gains ordividends during a year, the investor has topay taxes on the amount realizedThe investor's basis (i.e., the amount theinvestor is assumed to have paid for themutual fund shares) is adjusted to avoiddouble taxation when the shares are sold3RiskManagementandFinancialInstitutions3e,Chapter4,CopyrightJohnC.Hull 2012
Tax ⚫ Tax is paid as though the investor owned the mutual fund investments ⚫ If the mutual fund realizes capital gains or dividends during a year, the investor has to pay taxes on the amount realized ⚫ The investor’s basis (i.e., the amount the investor is assumed to have paid for the mutual fund shares) is adjusted to avoid double taxation when the shares are sold Risk Management and Financial Institutions 3e, Chapter 4, Copyright © John C. Hull 2012 3
Types of FundEquityBondHybridMoney MarketIndexRiskManagementandFinancialInstitutions3e,Chapter4,CopyrightJohnC.Hull20124
Types of Fund ⚫ Equity ⚫ Bond ⚫ Hybrid ⚫ Money Market ⚫ Index Risk Management and Financial Institutions 3e, Chapter 4, Copyright © John C. Hull 2012 4
Costs (Table 4.2)Annual feeFront-end loadBack-end loadRelatively low in USRelatively high in Canada, DenmarkFinland, Italy, Norway, and Spain5RiskManagementandFinancialInstitutions3e,Chapter4,CopyrightJohnC.Hull2012
Costs (Table 4.2) ⚫ Annual fee ⚫ Front-end load ⚫ Back-end load ⚫ Relatively low in US ⚫ Relatively high in Canada, Denmark, Finland, Italy, Norway, and Spain Risk Management and Financial Institutions 3e, Chapter 4, Copyright © John C. Hull 2012 5