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Lessons From The Intelligent Investor

Lessons From The Intelligent Investor

If you're like a lot of people watching the recession unfold, you have likely started to look at your finances under a microscope. Perhaps you have started saving the annual savings rate by people has started to recover a bit.

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Lowest Cost No Load Mutual Funds And Etfs

This inexpensive ebook will help you in three main ways: It will improve your understanding of investing by summarizing what the research literature actually says does and does not work when investing. It conveniently provides a directory of the lowest cost, diversified no load mutual funds and Etfs available to US investors for direct investing. The book lists over 200 lowest cost, no load mutual funds in 30 global, international, and US stock, bond, real estate, and money market fund asset category tables. It also lists the over 200 lowest cost Etfs in 29 global, international, and US stock, bond, and real estate asset category tables. All these low cost funds are screened from the universe of available funds using objective factors supported by university research and discussed in this ebook. This ebook helps you to put your investing strategy on autopilot. Increase diversification, lower risks, and reduce investment costs, so that you can save a lot of money and time year after year after year.

Lowest Cost No Load Mutual Funds And Etfs Summary

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Author: Larry Russell
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Preface Of Mutual Fund

Cept of accountability for full disclosure of material information, together with fair trading practices, with the intent of protecting unsophisticated investors who were inadequately prepared to look after themselves. However, from the very beginnings of key legislation, notably the Securities Act of 1933 and the Securities Exchange Act of 1934, there were exemptions from the disclosure laws for sophisticated investors who were thought not to need them. Government securities (including municipal bonds) were exempt from Securities and Exchange Commission (SEC) registration so were securities of government agencies and certain bank stocks. Corporate securities had to be registered only if they were to be offered through public distributions. If not, they could be sold to sophisticated investors as private placements without complying with the disclosure rules. Mutual funds sold to public investors had to be registered, but private investment funds investing in venture capital,...

In Recent Years Large Financial Institutions Such As Mutual Funds And Pension Funds Have Been Becoming The Dominant

Agency Problems and Corporate Ownership Corporate ownership varies around the world. Historically, individuals have owned the majority of shares in public corporations in the United States. In Germany and Japan, however, banks, other large financial institutions, and other companies own most of the stock in public corporations. Do you think agency problems are likely to be more or less severe in Germany and Japan than in the United States Why In recent years, large financial institutions such as mutual funds and pension funds have been becoming the dominant owners of stock in the United States, and these institutions are becoming more active in corporate affairs. What are the implications of this trend for agency problems and corporate control

Is Hedge Fund Performance Persistent

This is the age-old question with respect to all asset managers, not just hedge funds Can the manager repeat her good performance This issue, though, is par 13 See Brown, Goetzmann, and Ibbotson, Offshore Hedge Funds Survival and Performance, 1989-1995, and Schneeweis and Spurgin, Multifactor Analysis of Hedge Fund, Managed Futures, and Mutual Fund Return and Risk Characteristics. 14 See Goldman, Sachs & Co. and Financial Risk Management Ltd., The Hedge Fund Industry and Absolute Return Funds and Hedge Funds Revisited and Mark Anson, Financial Market Dislocations and Hedge Fund Returns, working paper, 2001. 15 See The New York Times, Hedge Fund Industry Creates a Dinosaur The Macro Manager, May 6, 2000, Section B. ticularly acute for the hedge fund marketplace because hedge fund managers often claim that the source of their returns is skill-based rather than dependent upon general financial market conditions. Unfortunately, the existing evidence is mixed, and there is no clear...

Assume You Have All Your Wealth A Million Dollars Invested In The Vanguard 500 Index Fund And That You Expect To Earn

Assume you have all your wealth (a million dollars) invested in the Vanguard 500 index fund, and that you expect to earn an annual return of 12 , with a standard deviation in returns of 25 . Since you have become more risk averse, you decide to shift 200,000 from the Vanguard 500 index fund to treasury bills. The T.bill rate is 5 . Estimate the expected return and standard deviation of your new portfolio.

Graphical Presentation Of The Hedge Fund Industry

It should be no surprise to most investors that hedge funds operate differently from traditional long-only investment managers. Long-only managers typically invest in either the equity or bond market, but do not leverage their investment bets. Therefore, their investment programs have considerable market risk exposure, but very little leverage or credit risk exposure.1 1 For an excellent and more detailed discussion on this type of classification, see CrossBorder Capital, TSS(II)-Tactical Style Selection Integrating Hedge Funds into the Asset Allocation Framework, Hedge Fund Research (August 2000). A prior version of this paper appeared as Mark Anson, Selecting a Hedge Fund Manager, The Journal of Wealth Management (Winter 2000). At the other end of the scale are private equity managers. They take no credit risk, but have the greatest exposure to market risk. Most private equity funds, for instance, have lock-up periods between 7 and 10 years. Investments made by private equity funds...

Hedge Funds that Have Low Market and Credit Risk

Nonetheless, the risk associated with this type of hedge fund strategy is less than that for the stock market. If the investor is already comfortable with investments in the stock market, market neutral programs will fit within their existing risk profile. The only risk management comment is the one that applies throughout this chapter diversify. Broaden the investment base with more than one risk neutral manager, so that stock specific risk does not become concentrated in the same company names. Finally, we consider the market timing hedge funds. These hedge funds have greater risk than market neutral funds the standard deviation of their returns is 1.96 , about twice that of market neutral hedge funds. However, market timers demonstrate about one half the risk of the S&P 500. Therefore, this strategy is also lower in risk compared to the general stock market. Add to this conclusion a distribution of returns that has a positive skew and a lower than normal exposure to outlier events,...

Opportunistic Hedge Fund Investing

The term hedge fund can be misleading. Hedge funds do not necessarily have to hedge an investment portfolio. Rather, they can be used to expand the investment opportunity set. This is the opportunistic nature of hedge funds they can provide an investor with new investment opportunities that she cannot otherwise obtain through traditional long only investments. There are several ways hedge funds can be opportunistic. First, many hedge fund managers can add value to an existing investment portfolio through specialization in a sector or in a market strategy. These managers do not contribute portable alpha. Instead, they contribute above market returns through the application of superior skill or knowledge to a narrow market or strategy. Consider a portfolio manager whose particular expertise is the biotechnology industry. She has followed this industry for years and has developed a superior information set to identify winners and losers. On the long only side the manager purchases those...

Should Hedge Funds Be Part Of An Investment Program

Before considering hedged funds as part of a strategic investment program, we must first ask the question Are they worth it Initially, we must consider the return potential of hedge funds. Second, we must determine whether hedge funds have a place within a diversified portfolio that includes stocks and bonds. Goldman, Sachs & Co. and Financial Risk Management Ltd. in two reports study the returns to hedge funds over two time periods, 1993-1997 and 1994-1998.2 Over the first time period, they find the return to four categories of hedge funds, Market Neutral, Event Driven, Equity Long Short, and Tactical Trading, to earn average annual returns of 13.37 , 17.25 , 19.29 , and 19.48 , respectively. This compared to an average annual return for the S&P 500 of 20.25 over the same time period. However, the volatility for each class of hedge funds was significantly lower than that for the S&P 500. 1 See Chip Cummins, Hedge Funds Not Worried about Pending U.S. Regulations, Dow Jones...

Hedge Fund Research

Chicago-based Hedge Fund Research HFRI offers a much more detailed description of strategies by breaking each area into various subsectors as outlined below Equity Non-Hedge. Equity Non-Hedge funds are predominantly long equities although they have the ability to hedge with short sales of stocks and or stock index options. These funds are commonly known as stock-pickers. Some funds employ leverage to enhance returns. When market conditions warrant, managers may implement a hedge in the portfolio. Funds may also opportunistically short individual stocks. The important distinction between equity non-hedge funds and equity hedge funds is equity non-hedge funds do not always have a hedge in place. In addition to equities, some funds may have limited assets invested in other types of securities. Fixed Income Diversified. Fixed Income Diversified funds may invest in a variety of fixed income strategies. While many invest in multiple strategies, others may focus on a single strategy less...

General Classification For Hedge Funds

Recall that in Chapter 4 we provided a graphical comparison between hedge funds and traditional long-only managers. Long-only managers typically invest in either the equity or bond market, but do not leverage their investment bets. Therefore, their investment programs have considerable market risk exposure, but very little leverage or credit risk exposure. In Exhibit 2, we graph the ten different hedge fund styles that we discussed in Chapter 2. We can separate these hedge funds into three broad groups (1) those hedge funds that have market risk, (2) those hedge funds that have credit risk, and (3) those hedge funds that minimize credit and market risk. 6 Bing Liang, On the Performance of Hedge Funds, Financial Analysts Journal (July August 1999). 7 Thomas Schneeweis and Richard Spurgin, Multifactor Analysis of Hedge Fund, Managed Futures, and Mutual Fund Return and Risk Characteristics, The Journal of Alternative Investments (Fall 1998), pp. 1-24. Exhibit 2 Hedge Funds Equity long...

Private Equity Funds with Carbon Credit Enhanced Internal Rate of Return

Fund (REEF), a carbon equity fund designed to help mitigate the impacts of climate change while generating profitable returns for investors. Projects that are eligible for the fund include on- and off-grid renewable energy and energy efficiency projects in developing countries. Asset managers are anticipating a 20 percent return on the 100 million fund, along with the potential of capturing carbon credits from the projects that would generate further income (Cooper 2000a). Dexia-FondElec Energy Efficiency and Emission Reduction Fund Also in 2000, the European Bank for Reconstruction and Development (ERBD) and the Franco-Belgian banking group Dexia launched a new private equity fund aimed at reducing energy consumption and greenhouse gas emissions in Central and Eastern Europe. The e 150 million ( 150 million) Dexia-FondElec Energy Efficiency and Emission Reduction Fund (EEER) has a number of power companies as investors. In addition to cash returns, the chosen projects should also...

Additivity example 2 Openend mutual funds

The webpage of the United States Securities and Exchange Commission (SEC) defines a mutual fund as A mutual fund is a company that brings together money from many people and invests it in stocks, bonds or other assets. The combined holdings of stocks, bonds or other assets the fund owns are known as its portfolio. Each investor in the fund owns shares, which represent a part of these holdings. Figure 17.2 gives some more information from the SEC about mutual funds.

Mutual Funds and Electronic Traded Funds

There are all types of mutual funds and electronic traded funds, and investors often choose them as alternatives to assembling their own portfolio of securities. Of course, you could have a portfolio of mutual funds too. There are proponents of mutual funds, and then there are those who favor a careful selection of stocks to address an investor's very individual requirements. In recent years, the Gold Electronic Traded Funds have emerged, and they provide a means for trading mining stocks, not just gold stocks. They are becoming popular as an alternative form of precious metal investing or to provide greater diversification outside of possession of precious metals. Unless you wish to study individual stocks, mutual funds and ETFs are a possible answer, although they need to be analyzed just as carefully. International funds are mutual funds targeted at foreign investment and often at emerging markets. They have done very well at times. Morn-ingstar (www.morningstar.com) provides the...

Example 3 Closedend mutual fundswhen additivity fails

Value-additivity doesn't always work. In this subsection we give an example of closed-end mutual funds. These are investment companies for which value additivity usually fails. A closed-end mutual fund is an investment company with a fixed number of shares. Like open-end mutual funds, closed-end mutual funds invest in a portfolio of stocks. As opposed to an open-end mutual fund, however, where the number of shares can be expanded or contracted, a closed-end mutual fund has a fixed number of shares which are sold on the stock market. The company issues no more new shares, and the market price fluctuates with supply and demand for the fund's shares. What should be the price of a Chippewa Fund share It seems that it should be equal to the per-share value of the fund's assets in our case 100 per share (as you saw in our discussion of open-end mutual funds, the finance jargon is the net asset value of the Chippewa Fund is 100 per share). But checking the newspapers, you find that the share...

Infesting in Bond Funds

Now that you know a fair amount about bonds and bond funds and how they differ, it's time to get down to how and why you might use bonds. Bonds may be boring, but they can be more profitable for you than super-boring bank savings accounts and money market funds. Bonds pay more than these investments because they involve more risk You're purchasing an investment that is meant to be held for a longer period of time relative to savings accounts and money market funds. As I discuss earlier in this chapter (in the section, Maturity Bonds act their age ), bond funds are riskier than money market funds and savings accounts because their value can fall if interest rates rise. However, bonds tend to be more stable in value than stocks (see Chapter 1).

Due Diligence for Hedge Fund Managers

In our prior chapters we addressed the questions of what (What are hedge funds ), why (Why should hedge funds be included in an investment portfolio ), and how (How should a hedge fund manager be selected ). We now turn to the question of who. Who should be selected as your hedge fund manager will depend on due diligence. Due diligence starts the initial process of building a relationship with a hedge fund manager. It is an unavoidable task that investors must follow in order to choose a manager. Due diligence is the process of identifying the best and the brightest of the hedge fund managers. This is where the investor must roll up her sleeves and get into the devilish details that can prove to be so elusive with hedge fund managers.

Conflicts of Interest in Mutual Fund Management

The Investment Company Act of 1940 requires that mutual funds be organized as corporate entities, and that a majority of the members of fund's boards be independent individuals not associated with the fund's investment adviser or management company. Indeed, most mutual funds have a supermajority (i.e., two-thirds) of independent directors. Directors have fiduciary duties of care and loyalty to the investors in the mutual fund, and therefore are responsible for safeguarding their interests. Inevitably, however, a variety of potential conflicts of interest face the mutual funds industry. 1. Fund managers prefer independent directors who comply with the rules but are cooperative, supportive, and not difficult to work with. Investors prefer directors who will robustly perform their fiduciary duties to the mutual fund shareholders. Fund managers nominate directors of new mutual funds. They are subsequently elected by shareholders, and then assume the responsibility for future board...

The Lazy Hedge Fund Investor The Donothing Crowd

Earlier in the book, I argued that a convergence story is unfolding whereby mutual funds, ETFs, and hedge funds begin offering products that mimic each other. In Chapter 6 we listed several mutual funds that copy hedge fund strategies, most typically using Market Neutral techniques. In fact a BusinessWeek article ( Hedging without a Hedge Fund,'' August 31, 2006) listed five selective mutual funds that are available to retail investors without having to discover or implement any strategies on their own Convertible Arbitrage. Calamos Market Neutral Income Fund CVSIX has been around for 15 years and carries a front-end load of 4.75 Long Short. The Quaker Strategic Growth Fund QUAGX similarly buys stocks from all investment sectors and shorts stocks based on proprietary methods. Its annualized return over a five-year period ending August 2006 was 7.54 percent beating the S&P 500. However the front-end load of 5.5 percent and annual fee of 2.04 percent are relatively high.

Recommended Bond Funds

If you've read through this chapter, you now know more about bond funds than you probably ever imagined possible so now it's time to get down to brass tacks selecting bond funds for a variety of investing needs. Using the logic laid out earlier in this chapter, I present you with a menu of choices. Although thousands of bond funds are available an overwhelming number of choices not that many are left to consider after you eliminate high-cost funds (those with loads and ongoing fees), low-performance funds (which are often the just mentioned high-cost funds), and funds managed by fund companies and fund managers with minimal experience investing in bonds. Use the following funds only if you have sufficient money in your emergency reserve (see Chapter 3). If you're investing money for longer-term purposes, particularly retirement, come up with an overall plan for allocating your money among a variety of different funds, including stock and bond funds. For more on allocating your money,...

Taxable shortterm bond funds

Bond funds that pay taxable dividends are appropriate if you're not in a high tax bracket (less than 28 percent federal) and for investing inside retirement accounts. (Call the fund companies for current yields.) Vanguard Short-Term Corporate Portfolio invests about 85 percent of its portfolio in high- and moderate-quality, short-term corporate bonds (the average credit rating is A to AA). Typically, it keeps the rest of its portfolio in U.S. Treasuries. It may even stray a bit overseas and invest several percent of the fund's assets in promising foreign bonds. This fund maintains an average maturity of two to three years, and duration currently is 2 years. Ian MacKinnon and Robert Auwaerter have co-managed Vanguard's Short-Term Corporate fund since the early 1980s (between them, MacKinnon and Auwaerter boast four decades of bond investing experience). All told, this fund invests in about 200 bonds (imagine having to keep track of all of them by your poor little old lonesome ). This...

Hedge Funds that Exhibit Market Risk

We use Exhibits 4 and 5 for comparison as we examine the distributions associated with hedge fund returns. We begin with those hedge funds that take more market risk than credit risk. These include global macro hedge funds, short selling hedge funds, and equity long short hedge funds. Equity Long Short Hedge Funds This type of investing focuses on stock selection. This is the source of what many hedge fund mangers claim is skill-based investing. Rather than mimic an equity benchmark, these managers focus their skill on a particular market segment or industry sector to generate their returns. Equity long short strategies tend to have a long bias. That is, equity long short managers tend to be more on the long side of the market than they are on the short side. Partly this is because it is more difficult to borrow stocks to short, and partly it is because many long short equity managers came from the traditional long-only investment world and thereby have a long bias. Therefore, we...

US Treasury shortterm bond funds

Treasury bond funds are appropriate if you prefer a bond fund that invests in U.S. Treasuries (which have the safety of government backing) or if you're not in a high federal tax bracket (less than 28 percent), but you are in a high state tax bracket (5 percent or higher). I don't recommend Treasuries for retirement accounts because they pay less interest than fully taxable bond funds. (Call the fund companies for current yields.) Vanguard Short-Term Treasury invests in U.S. Treasuries maturing within two to three years you can't get much safer than that. Duration currently is 2 years. Like Vanguard's Short-Term Corporate, this fund is managed by the bond dynamic duo of MacKinnon and Auwaerter. Although the fund has that lean Vanguard expense ratio of 0.3 percent annually, don't forget that you can buy Treasuries direct from your local Federal Reserve bank if you don't need liquidity. 3,000 is the minimum initial investment. Vanguard Admiral Short-Term U.S. Treasury does what the...

Municipal taxfree shortterm bond funds

Unfortunately, short-term bond funds that are free of both federal and state taxes are scarce. However, some good short-term funds are free of federal but not state taxes. These are appropriate if you're in a high federal bracket (28 percent and up) but in a low state bracket (less than 5 percent). Vanguard Municipal Short-Term Portfolio invests in the cr me de la cr me of the federally tax-free muni bonds issued by state and local governments around the country (its average credit rating is AAA). The fund's average maturity ranges from one to two years and duration currently is about 1 year. Vanguard Municipal Limited-Term does just what the short-term fund does (and has the same manager), except that it does it a while longer. This fund's average muni bond matures in two to five years, although its average credit rating is a respectable AA. Both the short-term and limited-term funds have a parsimonious annual operating expense ratio of 0.2 percent and require a 3,000 minimum initial...

Intermediateterm bond funds

Intermediate-term bond funds hold bonds that typically mature in a decade or so. They are more volatile than shorter-term bonds but should be more rewarding. The longer you can own an intermediate-term bond fund, the more likely you are to earn a higher return on it than on a short-term fund, unless interest rates keep rising over many years.

Taxable intermediateterm bond funds

Vanguard Index Total Bond Market is an index fund that tracks the index of the entire bond market, the Lehman Brothers Aggregate Bond Index. The fund is managed by Ian MacKinnon, Kenneth Volpert, and a computer. The index that this fund seeks to replicate has about 5,000 bonds, but this fund typically holds only about 10 percent of those bonds by using a sampling to mirror the index. Investment-grade corporate bonds and mortgages make up half of the investments, although the other half are U.S. government and agency securities. Annual operating expenses are a paltry 0.2 percent. To encourage longer-term investors and discourage trading, the fund charges a 10 annual account maintenance fee for balances under 10,000. You need a 3,000 minimum initial investment to open ( 1,000 for retirement accounts). 800-662-7447. PIMCO Total Return is managed in much the same way as the PIMCO Low M Duration fund (which I describe in the section, Taxable short-term bond funds ), and the two funds even...

US Treasury intermediateterm bond funds

Treasury bond funds are appropriate if you prefer a bond fund that invests in U.S. Treasuries (which have the safety of government backing) and if you're not in a high federal tax bracket (less than 28 percent), but you are in a high state tax bracket (5 percent or higher). I don't recommend Treasuries for retirement accounts because they pay less interest than fully taxable bond funds. (Call the fund company for current yields.) Vanguard Intermediate-Term Treasury invests in U.S. Treasuries maturing in five to ten years. Vanguard Admiral Intermediate-Term U.S. Treasury

Susan Webb Research Analyst Mutual Fund Group

After majoring in biochemistry, I joined the research department of a large mutual fund group. Because of my background, I was assigned to work with the senior pharmaceuticals analyst. I start the day by reading the Wall Street Journal and reviewing the analyses that come in each day from stockbroking firms. Sometimes we need to revise our earnings forecasts and meet with the portfolio managers to discuss possible trades. The remainder of my day is spent mainly in analyzing companies and developing forecasts of revenues and earnings. I meet frequently with pharmaceutical analysts in stockbroking firms and we regularly visit company management. In the evenings I study for the Chartered Financial Analyst exam. Since I did not study finance at college, this is quite challenging. I hope eventually to move from a research role to become a portfolio manager.

Municipal taxfree intermediateterm bond funds

Consider federally tax-free bond funds if you're in a high federal bracket (28 percent and up) but a relatively low state bracket (less than 5 percent). If you're in a high federal and state tax bracket, see the state and federally tax-free bonds later in this section. (Call the fund company for current yields.) Vanguard Municipal Intermediate-Term does what Vanguard's short-term muni funds do, except that it invests in slightly longer-term muni bonds (the average credit rating is AA). The annual operating expense ratio is 0.2 percent. 3,000 is the minimum initial investment. 800-662-7447. The state and federally tax-free bond funds listed in Table 8-2 may be appropriate if you're in high federal (28 percent and up) and high state (5 percent or higher) tax brackets. (If one is not listed for your state or if you're only in a high federal tax bracket, remember to use the nationwide Vanguard municipal bond fund that I describe in the preceding paragraph.) Term Bond Funds Vanguard CA...

Do Hedge Funds Undermine The Financial Markets

Hedge funds have often been made scapegoats for whatever ails the financial markets. This can be traced back to George Soros' currency attack on the British Pound Sterling. In 1992, George Soros bet heavily and correctly that the British government would not be able to support the pound and that the pound would devalue. In 1997, Soros was once again blamed for a currency crisis by the Malaysian Prime Minister Mahathir bin Mohammad. The Prime Minister attributed the crash in the Malaysian ringgit to speculation in the currency markets by hedge fund managers, including George Soros. Brown, Goetzmann, and Park test specifically whether hedge funds caused the crash of the Malaysian ringgit. They regress the monthly percentage change in the exchange rate on the currency exposure maintained by hedge funds. Reviewing the currency exposures of 11 large global macro hedge funds, they conclude that there is no evidence that the Malaysian ringgit was affected by hedge fund manager currency...

Money market mutual funds

Money market funds, a type of mutual fund (see Chapter 10), are just like bank savings accounts but better, in most cases. The best money market funds pay higher yields than bank savings accounts and allow check-writing. Most mutual fund companies don't have many local branch offices, so you may have to open and maintain your money market mutual fund through the fund's toll-free phone line, Web site, or the mail. Distance has its advantages. Because you can conduct business by mail, the Internet, and the phone, you don't need to go schlepping into a local branch office to make deposits and withdrawals. I'm happy to report that I haven't visited a bank office in many years. .cjAB Efi Despite the distance between you and your mutual fund company, your

US Treasury longterm bond funds

Treasury bond funds are appropriate if you prefer a bond fund that invests in U.S. Treasuries (which have the safety of government backing) and if you're not in a high federal tax bracket (less than 28 percent), but you are in a high state tax bracket (5 percent or higher). I don't recommend Treasuries for retirement accounts because they pay less interest than fully taxable bond funds. (Call the fund companies for current yields.) Vanguard Long-Term Treasury invests in U.S. Treasuries with average maturities around 20 years. Currently, duration is about 10 years. Vanguard Admiral Long-Term U.S. Treasury is for higher balance customers. (See the descriptions in the section, U.S. Treasury short-term bond funds, for minimum initial investments and expense ratios.) 800-662-7447. Municipal tax-free long-term bond funds VlCKs Vanguard Municipal Long-Term does what Vanguard's short-term muni funds do, except that it invests in long-term muni bonds (the average credit rating is AA)....

Recommended money market mutual funds

In this section, I recommend good money market mutual funds. As you peruse this list, remember that the money market fund that works best for you depends on your tax situation. Throughout the list, I try to guide you to funds that generally make sense for people in particular tax brackets. Fidelity Cash Reserves and Fidelity Money Market (800-544-8888 www.fidelity.com) Vanguard Prime Money Market (800-662-7447 www.vanguard. com) U.S. Treasury money market funds are appropriate if you prefer a money fund that invests in U.S. Treasuries, which have the safety of government backing, or if you're in a high state tax bracket (5 percent or higher) but not in a high federal tax bracket. Vanguard (800-662-7447 www.vanguard. com) offers a couple good options Vanguard Treasury Money Market Vanguard Admiral Treasury Money Market State-focused tax-free money market funds are appropriate when you're in a high federal and state tax bracket. Fidelity (800-544-8888 www. fidelity.com), USAA...

Exploring Alternatives to Bond Funds

Bond mutual funds are hardly the only way to lend your money and get paid a decent yield. In the following sections, I talk you through the pros and cons of other alternatives, some of which have acronyms you can impress your friends and family with or confirm that you're an investments geek. Regardless of which investment type(s) you end up purchasing, remember to do your big-picture thinking first What do you plan to use the money for down the road How much risk can you take and how much are you willing to take What's your tax situation Most of these bond fund alternatives have one thing in common They offer psychological solace to those who can't stomach fluctuations in the value of their investments. After I tell you more about these alternatives (including information that you're not likely to hear in a marketing pitch from the company or person who's trying to sell you on them), those low-cost bond funds will probably look more attractive.

US Treasury bond funds

Treasury bond funds are appropriate if you prefer a bond fund that invests in U.S. Treasuries (which have the safety of government backing), or when you're in a high state tax bracket (5 percent or higher) but not a high federal tax bracket. For good Treasury bond funds, look no further than the Vanguard Group, which offers short-, intermediate-, and long-term U.S. Treasury funds with a low 0.25-percent operating expense ratio. With a 100,000 minimum, Vanguard's Admiral series of U.S. Treasury funds offers even higher yields thanks to an even lower expense ratio of 0.10 percent.

State and federaltaxfree bond funds

State- and federal-tax-free bond funds are appropriate when you're in high federal and state (5 percent or higher) tax brackets. Vanguard (800-662-7447 www.vanguard.com) has the best selection of state-specific tax-free bond funds. USAA (800-382-8722 www.usaa.com) and, to a lesser extent, Fidelity (800-544-8888 www.fidelity.com) offer some of the better state-specific bond funds. Fidelity does have higher balance ( 10,000) requirements.

Stocks and stock funds

Stocks have stood the test of time for building wealth. (In Chapter 9, I discuss picking individual stocks versus investing through stock mutual funds.) Remember that when you invest in stocks in taxable (non-retirement) accounts, all the distributions on those stocks, such as dividends and capital gains, are taxable. Stock dividends and long-term capital gains do benefit from lower tax rates (maximum of 15 percent). Some stock picking advocates argue that you should shun stock funds due to tax considerations. I disagree. You can avoid stock funds that generate a lot of short-term capital gains, which are taxed at the relatively high ordinary income tax rates. Additionally, increasing numbers of fund companies offer tax-friendly stock funds, which are appropriate if you don't want current income or you're in a high federal tax bracket and seek to minimize receiving taxable distributions on your funds. Vanguard (800-662-7447 www.vanguard.com) offers the best menu of tax-managed stock...

Hedge Funds that Exhibit Credit Risk

The second general category of hedge funds lines up along the credit risk axis in Exhibit 2. We have merger arbitrage at the bottom of the credit risk axis and relative value arbitrage at the top end of the credit risk axis. The investment strategies of these funds involve taking only a little market exposure hence their label as arbitrage funds. However, these hedge funds magnify that exposure through credit risk. Additionally, these funds are exposed to event risk the risk that one part of their arbitrage strategy will not perform as expected. Their exposure to event risk should be demonstrated with a large, downside tail in their return distributions. In other words, they should exhibit distributions with a large value of kurtosis and a negative skew. Moreover, as we move up the credit risk axis, we should expect the distribution of returns to the hedge fund strategy to exhibit larger downside tails. Convertible arbitrage funds seek to buy undervalued convertible bonds and then...

Vanguard Wettesteg Income

This is among the most conservative and income-oriented of the hybrids. This fund typically has about two-thirds of its assets in high-quality bonds, with the other third in high-yielding, large-company stocks. Since its inception in 1970, the majority of this fund's returns have come from dividends. Like many of the other conservative Vanguard funds, this one is managed by Wellington Management and the dynamic duo of Earl McEvoy and John Ryan, who have about 50 years of investment experience between them.

Vanguards Funds of Funds

A fund of funds is simply a mutual fund that invests in other individual mutual funds. Although the concept is not new, it has become increasingly attractive to investors who are overwhelmed by the number of fund choices out there or who want to diversify. Vanguard offers some excellent funds of funds. Begun in 1985 and thus the oldest of the funds of funds the Vanguard Star fund is diversified across nine different Vanguard funds six stock, two bond, and one money market fund. Its targeted asset allocation is 63 in stocks, 25 in bonds, and 12 in the money market fund. This fund emphasizes value more than growth. It is also very U.S.-focused, seldom holding more than a few percent in foreign stocks. The Star fund's diversification comes cheap The average expense ratio of the underlying funds is 0.4 percent (there's no additional charge for packaging them together). The initial investment requirement is just 1,000 for both retirement and non-retirement accounts. Realizing that in the...

Good investments Noload mutual funds

As I discuss in Chapter 10, the professional management and efficiency of the best no-load mutual funds makes them a tough investment to beat. Chapters 11 and 12 provide recommendations for investing money in funds both inside and outside tax-sheltered retirement accounts. Gearing the investments to the time frame involved until your children will need to use the money is the most important issue with no-load mutual funds. The closer your child gets to attending college and using the money saved, the more conservatively the money should be invested.

Fidelity Asset Manager

Fidelity offers a number of hybrid funds that invest overseas as well as in the United States. They differ from Vanguard's offerings by making more radical shifts in strategies and investments held. Fidelity is one of the few companies that has the research capabilities to allow a fund manager to invest intelligently in many different markets.

Mutual Funds The Hidden

Mutual funds are the most popular investment vehicle in the country today. They have grown from a cottage industry in the early 1960s to become the dominant method for individual retirees to participate in the stock and bond markets. In most cases, they offer professional management and wide diversification. It's no wonder they have become the vehicle of choice for millions of Americans. While these mutual fund companies promote their investment track records, there is one disadvantage that they don't advertise very well. That disadvantage has to do with how mutual funds are taxed.

Computers amok Recommended index funds

Index funds, which I discuss in detail in Chapter 6, are passively managed that means an index fund's money is invested, using computer modeling, to simply track the performance of a particular market index, such as the Standard & Poor's 500. When you buy into an index fund, you give up the possibility of outperforming the market, but you also guarantee that you won't underperform the market either. Beating the market is extremely difficult most actively managed funds are unable to do it. The best index funds, however, have an unfair advantage they have the lowest operating expenses in the business. In Chapter 6,1 talk more about the virtues of index funds and what kind of role they should play in your portfolio. The following sections cover the best stock index funds available.

Vanguards index funds

Bogle, Vanguard's founder and former CEO, was the first person to take the idea of indexing to the mutual fund investing public he has been a tireless crusader for index funds ever since. Today, Vanguard continues to be the index fund leader with the lowest operating expenses (which directly translates into higher index fund returns) and the biggest index fund selection around. Vanguard's less aggressive index fund is a hybrid fund, Vanguard Balanced Index. Sixty percent of this fund's assets are invested in stocks according to the Wilshire 5000 Index the other 40 percent are invested in bonds to replicate the performance of the Lehman Brothers Aggregate Bond Index. The fund has a 0.2 percent annual operating expense ratio. The flagship of Vanguard's index fleet, the Vanguard Index 500 fund invests to replicate the performance of the popular stock market index the Standard & Poor's 500 Index which tracks the stocks of 500 large companies in the United States. These 500 stocks...

Mutual Fund Tax Advice

Beware of the mutual funds that you are holding or are considering purchasing for your taxable accounts. There could be huge gains that the fund manager is sitting on. While the fund manager may claim to not plan on selling these stock positions, don't count on this. Many times fund managers are forced to sell certain stocks for liquidity purposes. Most mutual funds are also registered as diversified mutual funds and by law are not allowed to hold more than 5 percent of the outstanding shares of any one individual company. Therefore, your fund manager may be forced to sell for this reason. In addition, most mutual funds experience frequent changes in their investment managers. It is not uncommon to see a manager change an average of every five years. Unfortunately, for tax purposes, a new manager who takes the helm of a mutual fund usually makes substantial changes to the portfolio. A new manager will typically sell off certain stock positions to place his or her own management style...

Discount Brokers Mutual Fund Supermarkets

For many years, you could only purchase no-load mutual funds directly from mutual fund companies. If you wanted to buy some funds at, say, Vanguard, Fidelity, T. Rowe Price, and USAA, you needed to call these four different companies and request each firm's application. So you ended up filling out four different sets of forms and mailing them with four envelopes, four stamps, and four separate checks. Soon, you received separate statements from each of the four fund companies reporting how your investments were doing. (Some fund companies make this even more of a paperwork nightmare by sending you a separate statement for each individual mutual fund that you buy through them.) Now suppose that you wanted to sell one of your USAA funds and invest the proceeds at Fidelity. This was also a time-consuming pain in the posterior, because you contacted USAA to sell, waited days for them to send you a check for the sales' proceeds, and then sent the money with instructions to Fidelity. It...

Recommended USfocused stock funds

This section focuses on the better actively managed funds that invest primarily in the U.S. stock market. I say primarily because some U.S. funds venture into overseas investments. Of all the different types of funds offered, U.S. stock funds are the largest category. To see the forest amidst the trees, remember the classifications I cover earlier in the chapter. Stock funds differ mainly in terms of the size of the companies they focus on and whether those companies are considered growth or value companies. w Some of these funds may invest a little overseas. The only way to know for sure where a fund is currently invested (or where the fund may invest in the fOl future) is to ask. You can start by calling the 800 number of the mutual fund X JJf company that you're interested in. You can also read the fund's annual report (which I explain how to do in Chapter 4). A prospectus, unfortunately, won't give you anything beyond general parameters that guide the range of investments it won't...

Fidelitys overabundance of funds

Although Vanguard is closing the gap, Fidelity is still the largest mutual fund company in America. Fidelity's success and reputation were built on U.S. stock fund management. Peter Lynch, who managed the Fidelity Magellan fund during the 1980s, is the manager who really got Fidelity noticed. In addition to Magellan, Fidelity had numerous U.S. stock funds that were beating the market averages. As the company grew explosively, Fidelity's ability to produce market-beating returns began to wane during the 1990s for three reasons. First, a number of the star managers left. Second, some of the stellar fund managers struggled to find good places to invest all the new money. Third, the cost savings in managing an increasingly larger mountain of money (in the form of a lower operating expense ratio) was not being shared with Fidelity's customers. I still like a number of Fidelity funds, but one does need to choose funds carefully at Fidelity. Fidelity is the Procter & Gamble of mutual funds....

Other noteworthy USfocused stock funds

Warburg Pincus Emerging Growth focuses on smaller company stocks and makes some investments overseas. It's managed by Elizabeth Dater, who has been managing this fund since its inception in 1988 and Stephen Lurito, who joined Dater in 1993 as co-manager. The Warburg Pincus company was in the private money management business first and then jumped into the mutual fund fray in the mid-80s. Expense ratio on this fund is a bit high 1.2 percent. If you go through discount brokers, normally you can purchase this fund without transaction fees. Minimum initial investment is 2,500 ( 500 for retirement accounts). 800-927-2874. Neuberger & Berman Guardian, Partners, and Focus are three stock funds run by Neuberger & Berman, a New York-based private money manager that's also been in the mutual fund business for decades. These three funds are similar in that they invest in a mixture of small- to large-cap stocks. The Focus and Partners funds tend to focus more on small- and medium-size company...

Taxable longtern bond funds

Dodge and Cox Income is run by a conservative management team at an old San Francisco investment firm that has been managing money for private accounts since 1930 and running mutual funds since 1931. This fund, which focuses on government securities and high grade corporate debt, is less volatile than most long-term bond funds. The operating expense ratio is 0.5 percent. 2,500 is the minimum initial investment ( 1,000 for retirement accounts). 800-621-3979. Vanguard Long-Term Corporate is comprised mostly of high-grade corporate bonds, but it sometimes holds around 10 percent in Treasuries and foreign and convertible bonds. Long-term bonds such as these can produce wide swings in volatility. For example, this fund lost more than 9 percent of its principal value in 1987, its worst year in a decade. The dividends of 9.2 percent paid that year brought the fund back to produce a total return of 0.2 percent. The fund is managed by Wellington Management's Earl McEvoy, who was new to the...

Recommended international funds

For diversification and growth potential, funds that invest overseas should be part of an investor's stock fund holdings. Normally, you can tell you're looking at a fund that focuses its investments overseas if its name contains words such as international, global, worldwide, or world. defeats the whole purpose of investing in funds. Funds that focus on specific regions, such as Southeast Asia, are better but still problematic because of poor diversification and higher expenses than other, more-diversified international funds. Because Buffett and his firm invest in many other companies' stocks, investing in his firm's stock is sort of like investing in a mutual fund. So if he's so shrewd a money manager, should you buy into his stock Probably not. Here's why. Because of Buffett's renowned stock-picking acumon, Berkshire Hathaway stock, unlike a true mutual fund, sells at a hefty premium to the value of the underlying stocks that Buffett and crew invest in. This stock commonly sells at...

Where To Put Your Indexed Investments Etfs Futures Or Index Mutual Funds

With the development of index futures and ETFs, investors have three major choices to match the performance of one of many stock indexes exchange-traded funds, index futures, and index mutual funds.9 The important characteristics of each type of investment are given in Table 15-1. As far as trading flexibility, ETFs and index futures far outshine mutual funds. ETFs and index futures can be bought or sold any time during the trading day and after hours on the Globex and other exchanges. In contrast, mutual funds can be bought or sold only at the market close, and the investor's order must often be in several hours earlier. ETFs and index futures can also be shorted to hedge one's portfolio or speculate on a market decline, which mutual funds cannot. And ETFs can be margined like any stock (with current Fed regulations at 50 percent), while index futures possess the highest degree of leverage, as investors can control stocks worth 20 or more times the value of cash. 9 Index mutual funds...

Vanguard International Grouth

Rowe Price International Stock, Vanguard International Growth invests primarily in large companies with growth potential, mainly in established countries. It also invests about 10 to 20 percent in emerging markets. International Growth is managed by London-headquartered Schroder Capital Management, which has research offices around the world focused on specific countries. The team is led by Richard Foulkes, who has managed this fund since its inception in 1981. This fund has a Vanguard-thin expense ratio of 0.6 percent and has been reasonably tax-friendly. Initial minimum investment is 3,000 ( 1,000 for retirement accounts). 800-662-7447.

How to Determine a Rate of Return for a Mutual Fund

The total return of a mutual fund includes the following three components Worksheet 38.1 provides the outline to determine a rate of return on your mutual funds. WORKSHEET 38.1 How to determine the rate of return on your mutual funds Step 1 Fill in your mutual fund data.

Actively Managed Etfs And Mutual Fund Posers

Because of the popularity of the ETF structure there will be sponsors and even mutual fund companies issuing so-called ''actively managed'' ETFs. These products structured either as an ETF or mutual fund may have hedge fundlike characteristics, but I strongly advise caution despite what no doubt will be seductive presentations and literature. Just remember, hedge fund managers are a very well-paid lot and the best won't be dealing in lower fee products that dilute their time and skills. So posers will no doubt enter the scene appealing to average investors who feel they've found a cheap way to get invested in hedge funds. They could be dead wrong.

International mutual funds

Investors may purchase shares of an international mutual fund with a small minimum investment, such as 1,000. Several brokerage firms, such as Merrill Lynch, Goldman Sachs, and Fidelity, create and manage many families of international mutual funds. Mutual funds are perhaps the most important by-product of the portfolio theory developed by Markowitz and Sharpe. Mutual funds are financial institutions that accept money from savers and then use these funds to buy a variety of securities. International mutual funds are portfolios of securities from various countries. International mutual funds have several advantages over individual foreign securities. First, international mutual funds pool funds and thus reduce risk by diversification. Second, investors would have to pay extra transaction and information costs if they attempted to buy foreign securities directly in foreign markets. Third, international mutual fund investors circumvent many legal and institutional barriers associated...

Exhibit 7 Closed End Open End and Interval Mutual Funds

14 If a closed-end company's shares trade in the secondary markets at a discount to net asset value, the mutual fund may be restricted in offering additional shares through a second public offering. This is because Section 23(b) of the Company Act prohibits closed-end companies from selling shares at a discount to net asset value. 14 If a closed-end company's shares trade in the secondary markets at a discount to net asset value, the mutual fund may be restricted in offering additional shares through a second public offering. This is because Section 23(b) of the Company Act prohibits closed-end companies from selling shares at a discount to net asset value.

The Near Collapse of a Prominent Hedge Fund

In late September 1998, a group of large financial institutions urgently invested 3.5 billion in Long-Term Capital Management (LTCM), a prominent hedge fund, to prevent its imminent collapse. These firms - Goldman Sachs, Merrill Lynch, Morgan Stanley Dean Witter, J. P. Morgan, Chase Manhattan, United Bank of Switzerland, and several others - had been encouraged to undertake the rescue by the Federal Reserve Bank of New York, which feared that a sudden failure of the fund could significantly disrupt world financial markets. The label hedge fund refers to investment companies that are unregulated because they restrict participation to a relatively small number of wealthy investors. The amount invested in hedge funds reached about 300 billion by mid-1998. The LTCM was formed in 1994, by a former Salomon vice chairman John Meir-wellen, two Nobel laureates Robert Merton and Myron Scholes, former students of Professors Merton and Scholes, and several other prominent investors. The fund...

The Fidelity Mutual Fund IRA Transfer Form

Use Oils form to authorize Fidelity to transfer your IRA directly from another IRA Custodian and invest it in a Fidelity mutual fund IRA. Please read the instructions on the back of this form before completing the Transfer Form. Mail your completed form In the enclosed envelope or to Fidelity Retirement Services, P.O. Box 660446, Dallas, TX 75266-0446. if you have any questions, call 1-800- 44-4774. Ml sections must be completed. Please type or print elearty. 1 am opening a new mutual fund IRA. Attached is my completed IRA application. 0 1 already own a Fidelity mutual fnnd IRA. B. Please list the name(s) of the Fidelity mutual fund(s) into which the transfer proceeds are to be deposited. 1. Fidelity Fund Name _ Percent of Proceeds 2. Fidelity Fund Name Mutual Fund Name I Transfer the proceeds to ray fidelity IRA at maturity unless indicated by checking the box at right for immediate liquidation Q. If you liquidate a CD prior to maturity, you may incur a penalty. Send us this Transfer...

Managed Accounts And Mutual Funds

Managed accounts have been available in the futures markets for several years and have provided a vehicle for those wishing to put some money into futures but lacked the expertise to do so themselves. Managed accounts have provided a sort of mutual fund approach to futures. Even though managed futures accounts invest in all futures markets including currencies, commodities, bonds, and stock index futures they still provide some measure of diversification from bonds and stocks. Part of the diversification is due to their practice of trading from both the long and the short side. Another part comes from the commodity portion itself. However, the ability to devote some of one's assets to commodities was made even easier during 1997. Oppenheimer Real Assets, launched in March 1997, is the first mutual fund devoted exclusively to commodity investing. By investing in commodity-linked notes, the fund is able to fashion a commodity portfolio that tracks the Goldman Sachs Commodity Index,...

Intermarket Analysis And Mutual Funds

It should be obvious that some understanding of these intermarket relationships can go a long way in mutual fund investing. The direction of the U.S. dollar, for example, might influence your commitment to small cap funds versus large cap funds. It may also help determine how much money you might want to commit to gold or natural resource funds. The availability of so many sector-oriented mutual funds actually complicates the decision of which ones to emphasize at any given time. That task is made a good deal easier by comparing the relative performance of the futures markets and the various stock market sectors and industry groups. That is easily accomplished by a simple charting approach called relative strength analysis.

The Performance Of Equity Mutual Funds

Unfortunately, the past record of the vast majority of such actively managed funds does not support this contention. There are two ways to measure long-term fund returns. One is to compute the returns of all funds that have survived over the period examined. But the long-term returns on these funds suffer from survivorship bias that overestimates the returns available to investors. This survivorship bias exists because poorly performing funds are often terminated, leaving only the more successful ones with long-term track records to be included in the data. The second, and more accurate, method is to compute, year by year, the average performance of all equity mutual funds in existence. Both of these computations are shown in Table 20-1. From January 1971 through December 2006, the average equity mutual fund returned 10.49 percent annually, 1.06 percentage points behind the Wilshire 5000 and 1.04 percentage points behind the S&P 500 Index. Indeed, the survivor funds returned 0.80...

When ou Sell jfour Mutual Fund Shares

Besides distributions, the other way to make money with a mutual fund is through appreciation. If the price of your shares moves higher than the price at which you bought them, then your investment has appreciated. Your profit is the difference between the amount you paid for the investment and the amount the investment is currently worth. For investments held outside of retirement accounts, that profit is taxable. Of course, the other way to avoid taxes on appreciated mutual funds is to hold them inside retirement accounts then you don't have to worry about capital gains taxes at all.

Comparison of a Tax Efficient Mutual Fund and a Tax Deferred Variable Annuity Account

Assuming you could find a tax-efficient mutual fund that could manage to obtain the most favorable long-term capital gains rate available of 18 percent (which became available starting December 31, 2000, for capital gains assets purchased from that date and beyond and held five years), the tax-deferred variable annuity could still be the better investment after taxes The following illustrations in Figures 7.12 and 7.13 assumes the same rate of return for each account.

Mutual fund accounting 101

If you understand the concept of basis for your fund investments, it's time to put that understanding to work. Here I'm going to walk you through the different ways commonly used by taxpayers and approved by the IRS to calculate your basis when you sell your non-retirement account mutual fund investments. If you sell all your shares of a particular mutual fund that you hold outside a retirement account at once, you can ignore this issue. (After reading through the accounting options that the IRS offers, you have more incentive to sell all your shares in a fund at once ) Be aware that after you elect one of the following tax accounting methods for selling shares in a particular fund, you can't change to another method for the sale of the remaining shares. If you plan to sell only some of your fund shares and it would be advantageous for you to, for example, specify that you're selling the newer shares first then choose that method. But, regardless of the method you choose, your mutual...

Now Im a Hedge Fund Manager

In the early days of hedge funds, and pretty much continuing until circa 2000, hedge fund managers had pretty much the same pedigree. A typical manager attended Harvard, received an MBA from Wharton, worked at Goldman, then for Tiger Management, before striking out on his own. When in early 2000 the initial public offering (IPO) market dried up, almost overnight, a bit of a chain reaction occurred. Venture capitalists and private equity shops suddenly had no clear exit strategy for their investments. High yield debt lenders can't lend if deal flow is nonexistent. And investment banks and underwriters started laying people off. Around the same time, hedge funds became increasingly popular, as institutional investors sitting on gobs of cash needed somewhere to put it. Although the causality and the linear description above may be simplistic and debatable, the result was not more and more frequently, people began reinventing themselves as hedge fund managers. A common trend was the...

How to Choose a Mutual Fund

There are more than 8,000 mutual funds on the market, and they are all vying for an investor's savings. Many of the messages in their advertisements lead you to believe that they have attained superior performance. Even if funds do well during good times, however, you need to examine how these funds have performed during a down market. Several business magazines track the overall performance records (during up and down markets) of many of the mutual funds, which is a better yardstick than the advertising messages of the mutual funds themselves. From these publications, potential investors can see how well funds have performed in up markets as well as how the funds have protected their capital during periods of declining prices. You can evaluate a mutual fund on the basis of performance namely, yield and total return, and the total expense ratio of the fund. But before doing that you should begin with the objectives of the fund. Mutual funds are required to send a prospectus to a...

How to Determine the Tax Consequences of Buying and Selling Shares in a Mutual Fund

Tax reporting on mutual funds can be complicated. Even if you buy and hold shares in a mutual fund, there are tax consequences. Dividends paid to investors may be automatically reinvested in the fund to buy more shares. At the end of the year, the mutual fund sends Form 1099 to each mutual fund holder showing the amount of dividends and capital gains received for the year. Individual shareholders pay taxes on these dividends and capital gains. Therefore, these dividends and capital gains need to be added into the cost basis when the investor sells shares in the fund. When you sell only a portion of your total shares, the calculation is different and may be tricky. It is further complicated if you have actively bought and sold shares. In fact, many mutual funds encourage shareholders to operate their funds like a checking account by providing check-writing services. However, every time you write a check against a bond or stock fund, there is a capital gain or loss tax consequence. This...

Fidelity Offers Diagnostic Program Online

Fidelity Investments has also announced the introduction of its own online diagnostic tool as a way for its sponsor clients to compare their workplace retirement programs against the features Fidelity's research finds most beneficial for plan design. Fidelity's Your Ultimate Plan Design also provides sponsors with a report, after the evaluation is completed, that enables them to follow certain outlined steps to improve their plans. Sponsors have always made it a priority to improve their plans based on internal objectives and broad industry measurements, says John W. Callahan, president of Fidelity Investments Tax-Exempt Services Company. This new diagnostic tool provides them with a valuable context in which to evaluate their plan's design and offers actionable steps that will help them maximize their programs and meet their key goals and objectives.

What We Really Mean By Hedge Fund

The term hedge fund is a misnomer that has become to mean, dependent on structure and goal, what one could just call ''performance partnerships.'' That is, investors seek out managers whom they believe can achieve high risk-adjusted investment results utilizing specific styles and strategies. Hedge fund managers are mostly notorious for the high fees they charge typically, 2 percent of assets under management and 20 percent of new profits, although a handful charge much higher amounts and the consequent headlines surrounding the personal income estimates of the most successful. We're not here to argue the rights and wrongs of those questions, but it does need to be kept in mind that virtually all managers report performance ''after'' fees, and they don't get paid until they actually make money for their clients. This contrasts with conventional mutual fund and advisory fee structures that pay flat fees whether the performance is positive or not. To give you a good idea of the number...

Introduction to Hedge Funds

The term hedge fund is a term of art. It is not defined in the Securities Act of 1933 or the Securities Exchange Act of 1934. Additionally, hedge fund is not defined by the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Commodity Exchange Act, or, finally, the Bank Holding Company Act. So what is this investment vehicle that every investor seems to know about but for which there is scant regulatory guidance As a starting point, we turn to the American Heritage Dictionary (third edition) which defines a hedge fund as Not a bad start, but we note that hedge funds are not investment companies, for they would be regulated by the Securities and Exchange Commission under the Investment Company Act of 1940.1 Additionally, some hedge funds, such as market neutral and market timing have conservative risk profiles and do not swing for the fences to earn extraordinary gains. We define hedge funds as Within this definition there are five key elements of hedge funds that...

Open End and Closed End Mutual Funds

The retail mutual fund industry is regulated by the Securities and Exchange Commission (SEC) under the Investment Company Act of 1940 (the Company Act). Under the Company Act, mutual funds are referred to as investment companies and are classified into two broad groups open-end companies and closed-end companies. Both types of companies offer their shares to retail investors through a public offering that must be registered with the SEC. However, there are numerous differences. continuous basis.13 Under Section 5(a)(1) of the Company Act, an open-end mutual fund is one that is offering for sale or has outstanding any redeemable security of which it is the issuer. A redeemable security means any security (other than short-term paper) under the terms of which the holder is entitled to receive approximately his proportionate share of the issuer's current net assets or the cash equivalent of his share of the net assets. This means that an open-end mutual fund must offer its shareholders...

Getting Started with Mutual Funds

Mutual funds allow investors to pool their money into a large fund organized by investment professionals. Investors own shares that represent stocks and bonds in several different companies. The number of shares you own depends on how much money you put in. The more you invest, the more shares you can buy. You don't need a trillion dollars to get started, either. Some mutual fund companies allow you to begin with as little as 50 a month. Plus, you can have access to your money all the time. And you can even invest in mutual funds that don't charge any sales charges. Mutual funds also tend to be less risky because they build on the idea of diversification. Mutual funds come in two basic flavors. Load funds are those that charge you a sales commission. (Keep in mind, however, that just because a load is being charged does not mean you'll earn a better return.) No-load funds do not charge their shareholders any sales commissions, but other expenses are sometimes assessed, such as...

Governance Rules For Bayou Hedge Fund

When hedge fund industry people think of Bayou, I'd bet most think of the information that was discussed by the press and others after the blow-up of this ironically named fund. It is not hard to see why, as the stories behind this spectacular implosion are certainly titillating. From Sam Israel sort of hiding out in his Westchester mansion, to the visual of him lying down in his office for great periods of time, in an effort to alleviate purportedly crippling back pain, from his colleague, Dan Marino's 2005 confession suicide letter delineating how the two had perpetrated a fraud for seven years and ultimately going through somewhere between 350 million to 450 million, to the firm's independent auditor turning out to be anything but independent, the stories started in mid-2005 and went on and on, culminating in one mention of Mr. Israel sending a more than 3 million check, that later bounced of course, with a picture of cartoon character SpongeBob SquarePants imprinted on it (luckily...

Vulture Investors and Hedge Fund Managers

Source Hedge Fund Research Inc. Finally, the growth of the distressed market has attracted another player to the game the hedge fund manager. Exhibit 7 illustrates that the amount of money committed to hedge fund managers that operate in the distressed market grew steadily from 1990 until 1998. In that year, the twin catastrophes of the Russian bond default and the Long Term Capital Management bailout wreaked havoc in the distressed bond arena. As a result of the poor performance of distressed debt in 1998, capital commitments to distressed debt hedge fund managers declined in 1999 and 2000.

Create Your Own ETF Hedge Fund

Additional Praise for Create Your Own ETF Hedge Fund ''In Create Your Own ETF Hedge Fund, Dave Fry channels his vast industry experience and keen insight into a practical and useful guide that will help investors effectively use ETFs as building blocks for their investment portfolios. Fry's description of how the markets developed along with the evolution of the participants and their incentives provides the context to further understand the relative effectiveness of ETFs, why ETFs have experienced such accelerated growth, and positive long-term prospects for the ETF industry and the investors who use them.'' Kevin Rich, CEO, DB Commodity Services LLC, a wholly owned subsidiary of Deutsche Bank AG Own ETF Hedge Fund J

Hedge Fund Due Diligence

Professional Tools to Investigate Hedge Fund Managers Hedge fund due diligence Professional tools to investigate hedge fund managers by Randy Shain. p. cm. - (Wiley finance series) Includes bibliographical references and index. ISBN 978-0-470-13977-6 (cloth website) 1. Hedge funds. I. Title. HG4530.S485 2008 332.64'524-dc22

The Why and Hout of Mutual Funds

I take you through the investing basics. If you don't understand the different types of investments that funds are made of, such as stocks and bonds, you won't fully understand funds. Part I defines and demystifies what mutual funds are and discusses what funds are good for and when you should consider alternatives. Before you're even ready to start investing in funds, your personal finances need to be in order, so in Part I, I give you some financial house-cleaning tips. You also discover the importance of fitting mutual funds to your financial goals. After your finances are shipshape and you've identified your goals, you are ready to find out how to pick great funds, how to avoid losers, where and how to purchase funds, and how to read all those pesky reports (such as prospectuses and annual reports) that fund companies stuff in your mailbox. Part I touches all these bases.

Brief History Of Hedge Funds

The first hedge fund was established in 1949, the Jones Hedge Fund. Alfred Win-slow Jones established a fund that invested in U.S. stocks, both long and short. Jones operated in relative obscurity until an article was published in Fortune magazine that spotlighted the Jones Hedge Fund.2 The interest in Jones' product was large, and within two years a survey conducted by the SEC established that the number of hedge funds had grown from one to 140. Unfortunately, many hedge funds were liquidated during the bear market of the early 1970s, and the industry did not regain any interest until the end of the 1980s. The appeal of hedge funds increased tremendously in the 1990s. By 1998, the President's Working Group on Financial Markets estimated that there were up to 3,500 hedge funds with 300 billion in capital and up to 1 trillion in total assets.3 Compare this size to mutual funds, where the amount of total assets was 5 trillion in 1998. Therefore, the hedge fund industry is about 20 of...

Hedge Fund Strategies

In Chapter 1 we indicated that hedge funds invest in the same equity and fixed income securities as traditional long-only managers. Therefore, it is not the alternative assets in which hedge funds invest that differentiates them from long-only managers, but rather, it is the alternative investment strategies that they pursue. In this section we review several alternative strategies that hedge funds apply. In general, some hedge funds have considerable exposure to the financial markets. This would be the long short, global macro hedge fund or short selling players. Other hedge funds take little market exposure, but use leverage to magnify the size of their bets. These are the arbitrage hedge funds. Last there are hedge fund strategies that take little credit or market risk. These are the market neutral and market timing strategies.

Mutual Funds An Investment

At their most basic, mutual funds are an investment. I know that, but please bear with me. I don't want to make the mistake that I see so many investment writers (and financial advisors) make starting with the more advanced stuff on the assumption that you know the basics. So often I hear from people reading about mutual funds and complaining that a writer starts throwing around terms such as small cap value stock fund and asset allocation without explaining them, and before you know it, you're lost in the weeds and frustrated. You have every right to be. If you already understand what stocks and bonds are, their risks and potential returns, terrific. You can skip this chapter. Most people, however, don't really understand the basics of investments, and that's one of the major reasons that people make investment mistakes in the first place. If you understand the specific types of securities that funds can invest in, you've mastered one of the important building blocks to understanding...

The Mutual Fund Industry Expands

Over the next few decades, the mutual fund industry continued to expand. During the 1950s, some 50 new funds were introduced. By 1954, the financial markets overcame its 1929 peak, and interest by a new generation of post-World War II investors emerged. The 1960s saw more investors coming into the marketplace as companies like Merrill Lynch, Pierce, Fenner, and Smith opened local offices on every street corner. Hundreds of new funds were established and billions of dollars in new asset inflows. A bear market in 1969 cooled the public's appetite for stocks, and the reversal of fortune ended the industry's enthusiasm for issuing new funds. Money flowed out of mutual funds as quickly as investors could redeem their shares. Crisis breeds innovation in the financial markets, and in the early 1970s, wise investors noticed that the performance of most mutual funds were lower than the return of the stock market. Investment costs became an important element of expected return. The concept of...

The First Exchange Traded Funds

In the wake of the market crash of 1987, and by request of the law firm of Leland, O'Brien and Rubinstein (LOR), the U.S. Securities and Exchange Commission started reviewing and rewriting securities regulations to make way for a new type of exchange-traded vehicle. In 1990, the SEC issued the Investment Company Act Release No. 17809, which ultimately paved the way for the formation of mutual funds that allowed for share creation and redemption during the day. Specifically, the Release No. 17809 granted LOR the right to create and file for a new security called a ''SuperTrust.'' The product was an index fund of sorts designed to give institutional investors the ability to buy or sell an entire basket of S&P 500 stocks in one trade on a stock exchange. The SuperTrust structure had the share creation and redemption characteristics of an open-end fund and the trading flexibility of a closed-end fund. SPDRs also filled a big void in the brokerage industry. Stockbrokers needed a way to...

Some Tips to Consider When Looking for a Good Mutual Fund to Use for Systematic Withdrawal Programs

To begin with, selecting an actively managed mutual fund over an index fund is highly recommended. In the short term, an index fund may have higher return figures, but long term, an actively managed fund that has managers at the helm would be your best bet. Economic conditions change quickly and having a fund manager who can take advantage of changing market conditions makes the most sense. An actively managed fund could shift into smaller company stocks or vary its percentage invested in various segments of the markets. Look for an experienced fund manager and management group with a proven fund track record. A fund that has seen down markets and survived those tough times could go a long way in keeping you on track to your financial goals. Likewise, the American Funds are good choices because several portfolio managers actively manage them. This method is called the multiple manager approach. They have an average of at least five investment managers per fund. They typically have...

The Mother Of All Mutual Fund Scandals

One thing is clear The mutual fund industry operates on a double standard. Certain companies and individuals have been given the opportunity to manipulate the system. They make illegal after-hours trades and improperly exploit market swings in ways that harm long-term investors. Aside from the litany of abuses already listed, the most publicized scandal was the so-called market timing'' affair that rocked the mutual fund industry further from 2002 to 2005. As was mentioned previously the consequences have been more than 2 billion in fines meted out to a variety of well-known brokerage firms, mutual funds, and hedge funds. Not many people realize that using mutual funds for ''market-timing'' strategies had been a long-standing practice among a small group of specialized asset managers, and a larger group of registered investment advisors handling client accounts. The constant skirmishing between these traders and mutual funds was a major contributing factor in the emergence of now...

Establishing a Hedge Fund Investment Program

The hedge fund market has demonstrated tremendous growth over the past decade. The amount invested in this market has grown from an estimated 50 billion in 1990 to 362 billion in 1999. However, the hedge fund market is highly fragmented. Conservative estimates put the number of hedge funds at over 2500 funds, with less than 20 funds managing 3 billion or more.1 The fragmented nature of the hedge fund market creates both opportunities and hazards for new investors in this arena. This chapter addresses the opportunities associated with hedge funds. We will discuss the hazards in later chapters. We begin with a review of the research on hedge funds where we address questions regarding the benefits of hedge funds within an investment portfolio, whether their performance is persistent, and whether hedge funds undermine the financial markets. We then consider the investment strategies that may be applicable to hedge funds.

The Hedge Fund Industry

The term hedge fund has recently become a household word. Originally only high net worth individuals could buy into them and regulators saw no urgency in regulating or registering them. This is the first characteristic of hedge funds. The second characteristic has to do with their investment practices. Most registered mutual funds have essentially two choices They could either go long in the stated asset class or stay in cash. Often there is a limit on the latter. Thus, mutual funds have no room for maneuver during bear markets. Hedge funds on the other hand were unregulated and could short the markets. This was perceived at that time to be the hedge for a down market, hence the term hedge fund emerged. The third difference is less well known. While traditional mutual funds normally only offer relative returns, hedge funds aim to offer absolute returns on an investment. For example traditional funds set for themselves stock or bond market benchmarks and then measure their performance...

Hedge Fund Investment Strategy

The above discussion demonstrates that hedge funds can expand the investment opportunity set for investors. The question now becomes What is to be accomplished by the hedge fund investment program The strategy may be simply a search for an additional source of return. Conversely, it may be for risk management purposes. Whatever its purpose, an investment plan for hedge funds may consider one of four strategies. Hedge funds may be selected on an opportunistic basis, as a hedge fund of funds, as part of a joint venture, or as an absolute return strategy. 22 See Stephen Brown, William Goetzmann, and James Park, Hedge Funds and the Asian Currency Crisis, The Journal of Portfolio Management (Summer 2000), pp. 95-101. 23 See William Fung and David Hsieh, Measuring the Market Impact of Hedge Funds, The Journal of Empirical Finance (2001).

An example of the use of a simple ttest to test a theory in finance can US mutual funds beat the market

Jensen (1968) was the first to systematically test the performance of mutual funds, and in particular examine whether any 'beat the market'. He used a sample of annual returns on the portfolios of 115 mutual funds from 1945-64. Each of the 115 funds was subjected to a separate OLS time series regression of the form

What Makes the Hedge Fund Manager so Smart

Before investing money with a hedge fund manager, an investor must determine one of the following. The hedge fund manager must be able to demonstrate that he or she is smarter than the next manager. One way to be smarter than another hedge fund manager is to have superior skill in filtering information. That is, the hedge fund manager must be able to look at the same information set as another manager but be able to glean more investment insight from that data set. Alternatively, if the hedge fund manager is not smarter than the next manager, he must demonstrate that he has a better information set his competitive advantage is not filtering information, but gathering it. To be successful, a hedge fund manager must demonstrate one or both of these competitive advantages. Generally speaking, quantitative, computer-driven managers satisfy the first criteria. That is, hedge fund managers that run computer models access the same information set as everyone else, but have better (smarter)...

In Practice Index Funds and Market Portfolios

Many critics of the capital asset pricing model seize on its conclusion that all investors in the market will hold the market portfolio, which includes all assets in proportion to their market value, as evidence that it is an unrealistic model. But is it It is true that not all assets in the world are traded and that there are transactions costs. It is also true that investors sometimes trade on inside information and often hold undiversified portfolios. However, we can create portfolios that closely resemble the market portfolio using index funds. An index fund replicates an index by buying all of the stocks in the index, in the same proportions that they form of the index. The earliest and still the largest one is the Vanguard 500 Index fund, which replicates the S&P 500 index. Today, we have access to index funds that replicate smaller companies in the United States, European stocks, Latin American markets and Asian equities as well as bond and commodity markets An investor can...

Hedge Fund Manager Organization

First, the basics Where is the hedge fund manager located, are there any satellite offices, and where is the nearest office to the investor These questions can be very important if the hedge fund manager operates overseas and there are significant time differences between the manager's business hours and that of the investor. Second, an organization chart is mandatory. Who is the Chief Executive Officer, the Chief Investment Officer, and Chief Operating Officer A warning It is not a good business plan if they are all the same person. Hedge fund managers should do what they do best invest money and leave the operating details to someone else. Of special importance is the Chief Financial Officer. The CFO will be the investor's most important link with the hedge fund manager after an investment is made because the CFO will be responsible for reporting the hedge fund manager's performance numbers. Consequently, the investor should make certain that the CFO has strong background in...

Face Off Mutual Funds Versus Individual Securities

According to a recent slew of books, newsletters, and magazine articles, (stock) mutual funds are not the place to be. They're boring, conservative, and totally unsexy. An amateur who devotes a small amount of study to companies in an industry he or she knows something about can outperform 95 percent of the paid experts who manage mutual funds, plus have fun in doing it. - Peter Lynch, Beating the Street

Managed Investment Alternatives to Mutual Funds

The unbelievably wide variety of mutual funds enables you to invest in everything from short-term money market securities to corporate bonds, U.S. and international stocks, precious metals companies, and even real estate. Although mutual funds can fill many investing needs as I discuss in Chapter 1 you may be interested in and benefit from directly investing in things such as real estate, your own business, and many other investments. Other types of privately managed investment accounts exist that have some things in common with mutual funds.

Lower Mutual Funds Fees with Hard Nosed Negotiation

Action We switched from a mutual fund that tracks the S&P 500 with an annual fee of 35 basis points to a common trust that the same provider offers that is priced at a fee of 20 basis points per year. We discovered this option only when we asked if any institutional pricing was available for a plan of our size. The provider told us only when we complained that its S&P 500 index fund was twice as expensive as Vanguard's. Controller, real estate, 1,600 employees, Maryland.

Build a Portfolio of Mutual Funds

Investing in more than one mutual fund is a great way to diversify your portfolio. But the question always remains How many mutual funds are too many Like a nervous five-year-old taking swimming lessons for the very first time, just getting your feet wet is a better beginning than jumping straight into the deep end. Getting your feet wet doesn't necessarily mean putting all of your money in low-risk mutual funds. That strategy would not be practicing diversification, and you wouldn't be lowering your risk. Low-risk funds may have a lot in cash periodically, which may not be what you want when you diversify. You lower your risk by mixing stock funds, bond funds, U.S. and overseas funds, and money market funds. Diversification offers the idea that a gain in one fund offsets losses in another. In financial mumbo jumbo, you should create a portfolio of funds that have a low core correlation with one another. keeping liquid (safe). This will help you decide how risk-tolerant you are....

Risk Management Part 1 Hedge Fund Return Distributions

Most of the prior studies of hedge funds have generally examined hedge funds within a mean-variance efficient frontier. Generally, Sharpe ratios are used to compare hedge fund returns to those of stock and bond indices. However, hedge funds may pursue investment strategies that have non-linear payoffs or are exposed to significant event risk, both of which may not be apparent from a Sharpe ratio analysis. Consequently, the distributions associated with hedge funds may demonstrate properties that cannot be fully captured by the mean and variance. The purpose of this chapter is to take some of the mystery out of hedge funds by examining their return distributions. Analyzing these return distributions will provide us with necessary insight to understand and manage the risks associated with hedge fund investing. Additionally, we should be able to determine whether there is, in fact, skill at work. We start with a brief review of the hedge fund literature on mapping the distribution of...

Accomplishing Goats With Mutual Funds

Mutual funds can help you accomplish various financial goals. The rest of this chapter gives an overview of some of these more common goals saving for retirement, buying a home, paying for college costs, and so on that can be tackled with the help of mutual funds. For each goal, I mention what kinds of funds are best suited to it, and I point you to the part of the book that discusses that kind of fund in greater detail. You'll start to see how important goal identification is in the mutual fund selection process. In most cases, only a few fund categories are appropriate for a specific financial goal. Once you've got your fund category, simply peruse Chapters 7 through 9 to find the best individual funds in that fund category. fund is appropriate. If you need to tap into the money within two or three years or less, a money market or short-term bond fund may fit the bill. If your time horizon falls between three and seven years, you want to focus on bond funds. For long-term goals,...

Review Of Hedge Fund Studies

In Chapter 3, we provided an extensive review of the research literature regarding hedge fund returns. A growing body of empirical research demonstrates that hedge funds can be a valuable addition to a diversified portfolio of stocks and bonds. We briefly summarize those articles that consider hedge funds within a portfolio context. These portfolio optimization studies demonstrate that the low correlation between the returns to hedge funds and those of traditional asset classes make hedge funds a valuable portfolio addition. Goldman Sachs & Co. and Financial Risk Management Ltd. find that a portfolio of 60 S&P 500, 30 Lehman Aggregate Bond Index, and 10 hedge funds outperformed a 60 40 allocation of stocks bonds by 78 basis points while reducing portfolio volatility by 31 basis points.1 Edwards and Liew find that an unconstrained optimization including stocks, bonds, and fund of hedge funds, selects an 84 allocation to an equally-weighted fund of hedge funds, 7 to the S&P500, and 10...

The Rise of Hedge Funds

Today, if asked to define a hedge fund, I suspect most folks would characterize it as a highly speculative vehicle for unwitting fat cats and careless financial institutions to lose their shirts. The first hedge fund utilized a straightforward concept. It existed primarily to manage risk by hedging long stock positions against relatively equal short positions. Alfred Jones usually gets the credit for being the first to implement this strategy in 1948 when he took 40,000 of his own funds and another 60,000 from other investors and set up a partnership to test his model. The initial strategy worked well enough to allow Jones to alter his investment vehicle in 1952 from a general partnership to a limited partnership. He added what was then a novel 20 percent incentive fee, which gave the advisor a share of profits. A version of the modern hedge fund was born. Today, Jones's initial hedged strategy is now known in the industry as a long short or market neutral'' methodology from among the...