Date: February 7, 2024

Topic: Types of Funds

Recall

The three most common types of funds are: ETF, Mutual Funds and Hedge Funds

• ETFs (Exchange-Traded Funds) are traded on exchanges and track indexes.
• Mutual Funds pool money from investors to invest in various assets.
• Hedge Funds are actively managed investment funds that typically use more complex strategies and are available to accredited investors.

Notes

Types of Funds

ETF

• Buy/sell like stocks
• Represents baskets of stocks
• Are transparent

Mutual Fund

• Buy/sell at end of day
• Quarterly disclosure of holdings
• Less transparent

Hedge Fund

• Buy/sell by agreement (usually secret)
• No disclosure
• Not transparent

Terms

Liquidity

• How easy it is to buy and sell a certain stock, ETFs tend to be very liquid

Market Cap

• Total value of a company (number of shares x price of shares)

Assets Under Management (AUM)

• Amount of money being managed by the fund

Expense Ratio

• How much is paid to a mutual fund expressed as a percent of your investments (0.04% expense ratio of $5000 = $2)

<aside> 📌 SUMMARY: The three major kinds of funds are ETFs, Mutual Funds and Hedge Funds

</aside>

Date: February 7, 2024

Topic: Manager Compensation

Recall

Managers are compensated differently based on the types of funds they manage

Notes

Compensation for Managers

ETF

• Compensated by expense ratio (0.01% to 1.00%)

Mutual Funds

• Compensated by expense ratio (0.05% to 3.00%)

Hedge Funds

• “Two and Twenty” - 2% of AUM + 20% of profits
• If a fund grows from $100m to $115m ($15m profits) the compensation could be:
  • “Two” = $100m * 0.02 = $2m (some funds may take the resulting value of $115m)
  • “Twenty” = $15m * 0.2 = $3m
  • Total compensation: $2m + $3m = $5m

Strategies differ based on earnings from two&twenty vs. expense ratio

Motivation for Managers

AUM accumulation: expense ratio (more heavily on this) + two&twenty (due to 2% of AUM)

Profits: two&twenty (due to 20% of profits)

Risk Taking: two&twenty (due to 20% of profits)

<aside> 📌 SUMMARY: Depending on the incentive of expense ratio or two&twenty, the manager strategies may differ

</aside>

Date: February 7, 2024

Topic: Hedge Fund Goals and Metrics