Module 9 - Equities Funds Management & Superannuation Introduction
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Questions and Answers

What is the main role of fund managers?

Professionally managing investors' funds.

What type of assets are categorized as growth assets?

Assets with greater levels of risk and return, such as shares and property.

What are some examples of alternative investments?

Art, commodities (gold, diamonds, minerals), collectables, and crypto.

What is a balanced portfolio?

<p>A portfolio with investments across different asset classes.</p> Signup and view all the answers

Who owns the funds in collective investments managed by fund managers?

<p>The retail investors.</p> Signup and view all the answers

Which type of assets are considered low risk/return assets?

<p>Cash and Deposits.</p> Signup and view all the answers

What is the purpose of superannuation funds?

<p>To establish a pool of assets that provide income in retirement and reduce reliance on government pensions.</p> Signup and view all the answers

What is the minimum contribution of income required for superannuation funds?

<p>11%</p> Signup and view all the answers

How does the wealth composition change as retirement approaches?

<p>Human capital decreases, and financial capital (superannuation savings) increases.</p> Signup and view all the answers

What are the main types of superannuation schemes mentioned?

<p>Accumulation Schemes and Defined Benefit Schemes</p> Signup and view all the answers

Who bears the investment and survivorship risks in Accumulation Schemes?

<p>Contributors</p> Signup and view all the answers

How is the payout received in Defined Benefit Schemes determined?

<p>Duration of work and level achieved</p> Signup and view all the answers

What are Public Unit Trusts?

<p>Public Unit Trusts are ASIC regulated collective investment schemes that raise funds by selling units to the public, representing a share of their assets.</p> Signup and view all the answers

How are funds raised in a Public Unit Trust?

<p>Funds in a Public Unit Trust are raised by selling units to investors, where one unit equals one share of their asset.</p> Signup and view all the answers

What are some key investment strategies of Hedge Funds?

<p>Hedge Funds use a wide range of complex and non-traditional investment strategies and very high levels of debt.</p> Signup and view all the answers

Why are Public Unit Trusts considered less popular over time?

<p>Public Unit Trusts are less popular over time due to the rising popularity of ETFs (Exchange Traded Funds).</p> Signup and view all the answers

What distinguishes Hedge Funds from Public Unit Trusts?

<p>Hedge Funds are private investment schemes not listed on ASX, while Public Unit Trusts are accessible to retail investors and raise funds by selling units to the public.</p> Signup and view all the answers

What role does a trustee play in a Public Unit Trust?

<p>A trustee in a Public Unit Trust owns assets on behalf of the trust and provides oversight to ensure compliance with the trust deed.</p> Signup and view all the answers

What type of investment funds aim to buy companies, improve their financial performance, and resell them at a profit?

<p>Private Equity Funds</p> Signup and view all the answers

What are the two main types of partners in a Private Equity Fund?

<p>Controlling Partners and Limited Partners</p> Signup and view all the answers

Who typically invest in Private Equity Funds prior to an Initial Public Offering (IPO)?

<p>Accredited, institutional investors</p> Signup and view all the answers

What kind of expertise do Private Equity Funds provide to companies they invest in?

<p>Operational expertise and resources</p> Signup and view all the answers

Why are investments in Private Equity Funds usually illiquid for investors?

<p>Investors are required to commit capital for several years and withdrawals are restricted for a period.</p> Signup and view all the answers

What kind of fees do Private Equity Funds typically charge?

<p>Management fees, percentage of Assets Under Management, and carried interest</p> Signup and view all the answers

Explain the difference between fundamental analysis and technical analysis in investment management.

<p>Fundamental analysis uses present value of expected future payments to select assets, while technical analysis uses historical data to predict future price movements.</p> Signup and view all the answers

What are some key elements considered in fundamental analysis?

<p>Market analysis, industry analysis, financial statement analysis, and discounted cash flow analysis.</p> Signup and view all the answers

How do momentum investors make investment decisions?

<p>Momentum investors buy when the price begins to rise, expecting the rise to continue, and sell when the price begins to fall.</p> Signup and view all the answers

What is the strategy followed by contrarian investors in the market?

<p>Contrarian investors buy when prices fall (believing they have fallen too much) and sell when prices rise.</p> Signup and view all the answers

Why is it important to consider risks when looking at investment management performance returns?

<p>Returns need to be evaluated with respect to the risks taken, as higher returns may come with higher risks.</p> Signup and view all the answers

Why are past returns not a reliable indicator of future returns in investment management?

<p>Past returns are not a good indicator of future returns because fund returns are unstable and subject to change.</p> Signup and view all the answers

Studies show passive funds have achieved higher returns after fees than ______ managed funds

<p>actively</p> Signup and view all the answers

Rating agencies S&P & Morningstar rate managers on their quantitative risk and return history and a qualitative assessment of the manager’s ______

<p>skill</p> Signup and view all the answers

Higher rated managers can continue to outperform but not ______

<p>consistently</p> Signup and view all the answers

Compared to other managers within the same category, ratings influence allocation of investment between active ______

<p>managers</p> Signup and view all the answers

The Performance of Active Vs Passive Investment: The EMH is correct, active managers should not be able to consistently earn excess returns for investors, especially after ______

<p>fees</p> Signup and view all the answers

Funds of Hedge funds (FOHFs) seek to reduce investor risk by investing in a range of hedge funds but impose an additional set of ______.

<p>fees</p> Signup and view all the answers

Hedge funds charge fees based on the percentage of assets under management and the percentage of ______ fees.

<p>performance</p> Signup and view all the answers

Private Equity Funds typically charge a management fee of 2% annually and a ______ fee of 20% of the profits above a certain level.

<p>performance</p> Signup and view all the answers

The common fee structure for Hedge Funds is known as 2/20, where 2 represents the management fee of 2% charged annually and 20 represents the ______ fee.

<p>performance</p> Signup and view all the answers

Leverage compounds the return that Hedge funds get and is also compounded through ______.

<p>derivatives</p> Signup and view all the answers

The fund manager pools all investor funds together to buy larger securities on exchanges and helps diversify portfolios of investors. The funds belong to the retail investors, who receive investment returns less fees paid to ______.

<p>fund manager</p> Signup and view all the answers

Assets with greater levels of risk and return, like shares and property, are known as growth assets. A growth portfolio is weighted towards high risk/return asset classes. Growth assets are more volatile, subject to market conditions and have potential for long term capital appreciation and higher ______.

<p>returns</p> Signup and view all the answers

Balanced portfolio refers to a portfolio with investments across asset classes. It includes assets with different levels of risk and return. Assets with low risk/return, such as cash and deposits, are considered ______.

<p>low risk/return assets</p> Signup and view all the answers

Alternative investments like art, commodities, collectibles, and crypto, which traditionally don’t trade on exchanges, fall under which category of the main asset classes? ______

<p>alternative investments</p> Signup and view all the answers

Fund managers provide collective investment services to surplus units by attracting funds from investors and professionally managing their investments. They contribute to the flow of funds through direct financing and provide a range of ______.

<p>investment opportunities</p> Signup and view all the answers

Private Equity Funds aim to buy companies, improve their financial performance, and resell them at a profit through a combination of ______ supplied by investors and debt.

<p>equity</p> Signup and view all the answers

Investors in Private Equity Funds are required to commit capital for several years and usually cannot withdraw it for a certain time period due to the amount of work and time needed to transform a company, making these investments usually ______.

<p>illiquid</p> Signup and view all the answers

Private Equity Funds typically charge management fees as a percentage of Assets Under Management and a percentage of the profit generated, known as ______ interest.

<p>carried</p> Signup and view all the answers

Investors in Funds of Hedge Funds (FOHFs) benefit from the diversification provided by investing in a portfolio of different hedge funds, reducing the overall ______ of the investment.

<p>risk</p> Signup and view all the answers

Funds of Hedge Funds (FOHFs) charge investors management fees and typically a percentage of the profits generated from their investments, known as ______ fees.

<p>performance</p> Signup and view all the answers

What is the fee structure for Hedge Funds commonly known as?

<p>2/20</p> Signup and view all the answers

In the context of investment management, what is the purpose of a performance fee?

<p>To compensate the fund manager for outperforming a predefined benchmark</p> Signup and view all the answers

How do Funds of Hedge Funds (FOHFs) seek to reduce investor risks?

<p>By diversifying investments across a range of hedge funds</p> Signup and view all the answers

What type of fee do Private Equity Funds typically charge as a percentage of the profits generated from their investments?

<p>Carried interest</p> Signup and view all the answers

Why are Private Equity Fund investments usually illiquid for investors?

<p>To encourage long-term commitment</p> Signup and view all the answers

What other significant financial event, besides the Global Financial Crisis (GFC) in 2007, had a negative impact on the total management value of hedge funds?

<p>Subprime Mortgage Crisis in 2008</p> Signup and view all the answers

What term represents the method through which hedge funds aim to outperform the market, seeking to gain returns beyond the normal market performance?

<p>Alpha</p> Signup and view all the answers

In the context of hedge funds, what does the term 'high water mark' refer to?

<p>A level of performance a fund must exceed before performance fees are charged</p> Signup and view all the answers

What is the main reason behind the creation of Funds of Hedge Funds (FOHFs)?

<p>To mitigate risks by investing in multiple hedge funds</p> Signup and view all the answers

What purpose do performance-linked fees serve in hedge funds?

<p>To provide incentives for the fund managers to outperform the market</p> Signup and view all the answers

What is a common fee structure for Hedge Funds known as, where the numbers 2 and 20 represent specific charges?

<p>2/20</p> Signup and view all the answers

In the context of Private Equity Funds, what does the term 'carry' refer to?

<p>Percentage of profits above a certain level paid to fund managers</p> Signup and view all the answers

What factor contributes to the instability of fund returns, making past returns unreliable indicators of future returns?

<p>Leverage compounding</p> Signup and view all the answers

In Funds of Hedge Funds (FOHFs), what does the term 'diversification' primarily aim to reduce?

<p>Overall volatility of the investment</p> Signup and view all the answers

What is a primary reason why contrarian investors believe in buying when prices fall?

<p>Market overreaction</p> Signup and view all the answers

What strategy is employed by momentum investors to make investment decisions based on price movements?

<p>Buying when prices rise</p> Signup and view all the answers

What is the standard percentage for the annual management fee typically charged by Private Equity Funds?

<p>2%</p> Signup and view all the answers

In Hedge Funds, what does the performance fee usually refer to?

<p>Percentage of profits collected beyond a certain return threshold</p> Signup and view all the answers

What makes past fund returns a poor predictor of future returns according to the text?

<p>Fund performance instability</p> Signup and view all the answers

What do Private Equity Funds typically aim to do with the companies they invest in?

<p>Resell them at a profit after improving their financial performance</p> Signup and view all the answers

How do funds of Hedge Funds (FOHFs) aim to reduce investor risk?

<p>Diversifying investments across hedge funds</p> Signup and view all the answers

What is a common characteristic of Funds of Hedge Funds (FOHFs) that make them attractive to investors?

<p>Reduce investor risk by investing in a range of Hedge Funds</p> Signup and view all the answers

Which type of investors are usually the Limited Partners in a Private Equity Fund?

<p>Institutional investors</p> Signup and view all the answers

What fee structure does a typical Hedge Fund follow, which includes an annual management fee and a percentage of profits earned above a certain level?

<p>2/20</p> Signup and view all the answers

How do Private Equity Funds generate high returns for investors while buying companies?

<p>Leverage to increase returns</p> Signup and view all the answers

Which approach to investment management involves ongoing research, frequent trading, and compensates through higher fees?

<p>Active Investment Management</p> Signup and view all the answers

What fee structure is commonly found in Hedge Funds, where 2 represents the management fee percentage and 20 represents the _____ fee?

<p>Performance fee</p> Signup and view all the answers

Which type of investment fund charges management fees as a percentage of Assets Under Management and a percentage of the profits generated above a certain level?

<p>Private Equity Funds</p> Signup and view all the answers

In Funds of Hedge Funds (FOHFs), what additional set of constraints do they impose to reduce investor risk?

<p>Investment restrictions</p> Signup and view all the answers

What financial strategy category involves buying companies, improving their financial performance, and reselling them at a profit?

<p>Private Equity Funds</p> Signup and view all the answers

What is the primary purpose of charging a management fee in hedge funds?

<p>Cover operational expenses and overhead costs</p> Signup and view all the answers

How do Funds of Hedge Funds (FOHFs) typically aim to lower risks for investors?

<p>By diversifying and investing in a range of hedge funds</p> Signup and view all the answers

What distinguishes Private Equity Funds from Hedge Funds and Public Unit Trusts in terms of their investment approach?

<p>Direct ownership and active management of companies</p> Signup and view all the answers

In the context of hedge funds, what is the purpose of a performance fee?

<p>Reward the fund manager for achieving gains above a specified hurdle rate</p> Signup and view all the answers

Why do Private Equity Funds usually charge a performance fee in addition to a management fee?

<p>To align the interests of fund managers with investors and incentivize superior performance</p> Signup and view all the answers

What distinguishes Funds of Hedge Funds (FOHFs) from regular Hedge Funds in terms of investors?

<p>FOHFs primarily attract retail investors, while Hedge Funds mainly attract institutional and high net worth investors</p> Signup and view all the answers

What is the primary reason private equity investments are usually illiquid for investors?

<p>As a result of the long duration needed to transform a company</p> Signup and view all the answers

What is the tiered fee structure in Hedge Funds that charges 2% annually and 20% of profits known as?

<p>2/20 rule</p> Signup and view all the answers

How do Performance fees benefit Hedge Fund managers?

<p>Performance fees motivate managers to achieve high returns for investors</p> Signup and view all the answers

What element is used to rate managers within the same category for fund allocation purposes?

<p>Ratings</p> Signup and view all the answers

Why do Funds of Hedge Funds (FOHFs) usually impose an additional set of requirements?

<p>To reduce investor risks by diversification</p> Signup and view all the answers

What is the primary reason behind Fees being structured the way they are in Hedge Funds?

<p>To align fund manager interest with that of investors</p> Signup and view all the answers

What is the goal of leveraging in Hedge Funds?

<p>To amplify returns</p> Signup and view all the answers

In what way do Funds of Hedge Funds (FOHFs) benefit investors in terms of risk reduction?

<p>By decreasing the dependency on individual hedge fund managers</p> Signup and view all the answers

How do Hedge Funds aim to consistently earn excess returns for investors despite the Efficient Market Hypothesis?

<p>By utilizing higher degrees of leverage</p> Signup and view all the answers

Study Notes

The Performance of Active vs Passive Investment

  • According to the Efficient Market Hypothesis (EMH), active managers should not be able to consistently earn excess returns for investors, especially after fees.
  • Studies have shown that passive funds have achieved higher returns after fees than actively managed funds.
  • Occasionally, an active manager can outperform for a number of years or within a particular area.

Ratings of Investment Managers

  • Rating agencies such as S&P and Morningstar rate managers on their quantitative risk and return history and a qualitative assessment of the manager's skill.
  • They use a 5-star rating scale, comparing managers within the same category (e.g., growth, balanced, defensive managers).
  • Research indicates that higher-rated managers can continue to outperform but not consistently.

Fund Management

  • Fund managers provide collective investment services to surplus units by attracting funds from investors and professionally managing their investments.
  • They contribute to the flow of funds through direct financing and provide a range of investment opportunities.
  • Fund managers pool all investor funds together to buy larger securities on exchanges, helping to diversify all portfolios of investors.

Asset Classes

  • Main asset classes include:
  • Equities
  • Property
  • Alternative investments (e.g., art, commodities, collectibles, crypto)
  • International Assets (e.g., international equity, bills, property)
  • Interest Earning Securities (e.g., bonds, NCDs, BAs)
  • Cash and Deposits

Portfolio Management

  • A balanced portfolio is a portfolio with investments across asset classes.
  • Assets with greater levels of risk and return (e.g., shares, property) are known as growth assets.
  • A growth portfolio is weighted towards high-risk/return asset classes.
  • Growth assets are more volatile, meaning they are subject to market conditions, with potential for long-term capital appreciation and higher returns.
  • Low-risk/return assets (e.g., cash and interest-earning securities) are called defensive assets.
  • A defensive portfolio holds a combination of growth and defensive assets.

Superannuation

  • Superannuation is a compulsory form of long-term savings.
  • Employers make contributions on behalf of employees.
  • The purpose is to establish a pool of assets that provide the contributor with income in retirement, reducing reliance on government pensions.
  • The minimum contribution is 11% of income, and contributions are subject to a concessitional tax rate.

Fund Structures

  • Accumulation schemes produce a lump sum that depends on the size of contributions and the rate of earnings on their investments.
  • Investment and survivorship risk are borne by contributors.
  • Defined benefit schemes commit to paying a specified benefit (either a lump sum or pension) to retirees.

Investment Strategies

  • Fundamental analysis selects assets based on the present value of expected future payments.
  • Technical analysis uses historical data to predict future asset price movements.
  • Strategies include:
  • Short selling
  • Long/short strategy
  • Derivatives
  • Program and high-frequency trading
  • Arbitrage
  • The carry trade

Hedge Funds

  • Hedge funds aim to make profits when share values fall as well as when they increase.
  • They are managed by professional fund managers who employ these strategies to outperform the market.
  • Hedge funds use leverage, borrowing money to increase their returns.
  • Fees are based on a percentage of assets under management and a percentage of performance fees.
  • Funds of Hedge Funds (FOHFs) seek to reduce investor risk by investing in a range of hedge funds.

Private Equity Funds

  • Private equity funds aim to buy companies, improve their financial performance, and resell them at a profit.
  • They use a combination of equity supplied by investors and debt.
  • Private equity funds are private, meaning they are not companies.
  • Controlling partners invest in and run the fund, while limited partners supply equity and pay fees.
  • Accredited, institutional investors participate in private equity funds.
  • Private equity funds provide strategic items to the company, operating expertise, and resources to generate high returns for investors.
  • They use leverage to buy companies, increasing returns but also increasing risk.
  • Investors are required to commit capital for several years, with a clause that it cannot be withdrawn for a certain time period.### Approaches to Investment Management
  • Two broad approaches: Active Investment Management and Passive Investment Management
  • Active Investment Management: pursuit of above-average returns, actively managed by a team or individual manager, using various investment analysis techniques, and aiming to outperform the market or benchmark
  • Passive Investment Management: practice of maintaining portfolios to closely match a benchmark index, with lower fees and lower level of analysis and research

Active Investment Management

  • Higher fees due to higher skills and time spent
  • Ongoing research and frequent trading, compensated through higher fees
  • Aim to make superior selection and timing decisions
  • Seek above-average returns, above those of competing managers and market

Passive Investment Management

  • Charge lower fees than active managers
  • Invest in a diversified portfolio of assets to achieve the same return as the market
  • Lower level of analysis and research

Trustees Superannuation

  • Trustees ensure scheme is managed in the interests of its members and funds are allocated according to the trust deed
  • Trustees have a fiduciary duty of care to the scheme's members
  • Do not guarantee returns
  • Heavily overseen by APRA
  • Trustees manage the trust, ensuring diversification, risk profile, and liquidity
  • Trustees set fees and charges for the fund and manage payment of benefits to members once retired

Allocation of Investment of Superannuation Schemes

  • Most superfunds invest in international and Australian shares, bonds, international fixed interest, cash, infrastructure, and property
  • Investing in international shares helps diversify away from unique Australian risk
  • Listed property: real estate investment trusts
  • Unlisted property: private property
  • Hedge funds

Superannuation Industry

  • Comprises: Not for Profit schemes, For Profit schemes, and Self Managed Funds (SMF)
  • Not for Profit schemes: established by employers, trade unions, and industry superfunds
  • For Profit schemes: established by professional managers, known as retail schemes
  • Self Managed Funds (SMF): trust with up to four members, all of whom must be trustees of the fund

Self Managed Funds (SMF)

  • Assets in the fund are managed by its members for the sole purpose of providing retirement income
  • Most operate under rules set by ATO
  • Reasons for SMFs: choose custom investments, minimise tax, customise riskiness of investments

Collective Investment Schemes

  • Enable ownership of a small portion of large portfolios of securities (or other assets)
  • Examples: Hedge funds, Public Unit Trusts, ETFs, and Private Equity Funds
  • Provide access to wholesale financial markets
  • Benefits: access to wholesale investments, economies of scale that lower transaction costs, diversified investments, investment expertise

Public Unit Trusts

  • ASIC regulated collective investment schemes
  • Raise funds by selling units to the public, which represent a share of their assets
  • Pooled funds are allocated by the trust's investment manager to assets specified by the trust deed
  • Mainly invest in share portfolios and commercial real estate to generate a return for investors
  • Fund managers earn fees (entry/exit, ongoing management fees) for management of trust

Exchange Traded Funds (ETFs)

  • (No specific details mentioned)

Hedge Funds

  • Pooled investment schemes that use a wide range of complex and non-traditional investment strategies and very high levels of debt
  • Managed by specialist financial managers
  • Mostly US-based, where managers are very aggressive
  • High returns, high risk, high failure rate, but some do achieve high returns
  • Mostly institutional and high net worth investors

Private Investment Schemes

  • Not listed on ASX
  • Difficult to buy into and add money to pool due to high amount requirement
  • Pool capital from credited investors

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