Investment Companies and Funds Overview

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Questions and Answers

What distinguishes equity trusts from mortgage trusts in the context of REITs?

Equity trusts lease real estate, while mortgage trusts buy equity in property developers.
Equity trusts invest in real estate directly, whereas mortgage trusts invest primarily in mortgage and construction loans. (correct)
Equity trusts invest primarily in mortgage loans, whereas mortgage trusts invest in real estate directly.
Equity trusts invest in real estate directly, while mortgage trusts invest in property management fees.

How are hedge funds typically structured in comparison to mutual funds?

Hedge funds require lower minimum investments than mutual funds and have no lock-up periods.
Hedge funds are always open to the general public, unlike mutual funds.
Hedge funds are commonly structured as private partnerships and are less regulated than mutual funds. (correct)
Hedge funds are typically structured as private partnerships and are subject to more SEC regulations.

Which of the following characteristics is true of mutual funds?

Mutual funds can easily change their structure to become hedge funds.
Mutual funds are typically managed by in-house employees only.
Mutual funds are owned by their shareholders and do not have individual employees. (correct)
Mutual funds primarily invest in illiquid assets without requiring fees.

In what way do hedge funds allow for investment flexibility that mutual funds typically do not?

Hedge funds are permitted to use derivatives and short sales extensively. (B) Signup and view all the answers

What is a primary reason governments encourage the development of funds?

To enhance liquidity and provide diverse investment opportunities for investors. (C) Signup and view all the answers

What distinguishes open-end mutual funds from closed-end mutual funds?

Open-end funds issue shares on demand to investors, while closed-end funds have a set number of shares. (D) Signup and view all the answers

What is a common fee associated with mutual fund management companies?

Load fee (B) Signup and view all the answers

What characteristic defines commingled funds?

The assets are typically separate between various types of investors. (B) Signup and view all the answers

How do Real Estate Investment Trusts (REITs) primarily generate income?

Through rental income from property and capital gains from property sales. (D) Signup and view all the answers

Which of the following is a key regulatory requirement for hedge funds?

Hedge funds are exempt from reporting requirements if they have fewer than 100 investors. (D) Signup and view all the answers

What role do management companies play in mutual funds?

They manage the mutual fund's portfolio and make investment decisions. (D) Signup and view all the answers

Which of the following best describes the investment strategy of hedge funds?

They typically use high-leverage strategies to amplify returns. (A) Signup and view all the answers

What is the main advantage of investing in mutual funds for individual investors?

They provide access to diversified portfolios without needing large capital. (B) Signup and view all the answers

What is the primary difference in share redemption between open-end and closed-end funds?

Open-end funds redeem shares directly, while closed-end funds require selling to other investors. (C) Signup and view all the answers

What is the typical annual fee range charged by a management company for managing a mutual fund?

0.2% to 1.5% (A) Signup and view all the answers

Which statement about commingled funds is correct?

They pool funds from partners, often managing larger portfolios collectively. (C) Signup and view all the answers

How do Real Estate Investment Trusts (REITs) primarily raise capital?

By selling shares and issuing bonds or mortgages. (D) Signup and view all the answers

What distinguishes closed-end funds from open-end mutual funds in terms of trading?

Closed-end funds are bought and sold on organized exchanges. (C) Signup and view all the answers

Which of the following is NOT characteristic of hedge funds?

They operate under strict regulatory oversight. (D) Signup and view all the answers

What type of accounts typically participate in commingled funds?

Trust or retirement accounts with larger portfolios. (A) Signup and view all the answers

What factor contributes to the typical high debt ratio in Real Estate Investment Trusts (REITs)?

The need to raise significant capital for real estate investments. (D) Signup and view all the answers

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Study Notes

Mutual Funds (Investment Companies)

Investment companies are key players in the financial market, pooling money from many investors and investing in financial instruments like stocks, bonds, and short-term debt.
The combined holdings of an investment company are referred to as its portfolio.
Investors buy shares in investment companies, which represent their ownership in the fund and the income it generates.

Real Estate Investment Trusts (REITs)

REITs are similar to closed-end funds, but they invest in real estate directly or in loans secured by real estate.
REITs can raise capital through share issuance, bank loans, and bonds.
Typically highly leveraged, a significant portion of their operations is financed by debt (commonly 70% debt ratio).

Hedge Funds

Hedge funds are privately managed investment funds open to wealthy or institutional investors.
They are not subject to stringent regulations like mutual funds and can use a wider range of investment strategies, such as derivatives, short selling, and leverage.
Often require initial lock-ups for investments, prohibiting withdrawals for a set period, typically several years.

Commingled Funds

Commingled funds are partnership-based, pooling funds from investors for a collective investment.
Managed by firms like banks or insurance companies, they are similar to open-end mutual funds, offering units instead of shares.
These funds are ideal for trusts or retirement accounts with large portfolios but not large enough to be managed separately.

Mutual Fund Structure: Open-end vs. Closed-end Funds

Open-end Funds:
- Stand ready to redeem or issue shares at their net asset value (NAV).
- Investors can purchase shares from or sell back to the fund at NAV, although some charges might apply.
- The number of outstanding shares changes daily based on investor activity.
Closed-end Funds:
- Do not redeem or issue shares; investors must sell their shares to other investors.
- Shares are traded on organized exchanges like stocks, through brokers.
- Their prices may differ from the NAV.