Finance Assignment Harvard Case Solution & Analysis

Finance Assignment Case Study Solution

How do hedge funds differ from open-end mutual funds? How are they similar?

The first difference between the hedge funds and the mutual funds is that the hedge funds are managed more aggressively as compared to the open-end mutual funds. There is much higher advantage in the hedge funds as they usually can take speculative positions by short selling the stocks or investing in the options. This also means that the risk of hedge funds is higher as compared to mutual funds. Mutual funds are a safer investment, they are not able to take advantage of highly leveraged positions, and they cannot make money when the market is falling.

The similarities between the hedge and mutual funds are that both of them are the managed portfolios of assets. Managed portfolios mean that in mutual funds and in hedge funds the managers decide and pick different securities, which they believe, would outperform the market and the returns of the portfolio would increase. Different positions are then sold to the investors and they are able to take part in the losses and gains of their holdings. The advantages of both the investments products are that investors get professional management of investments and diversification.

Question 2

Describe the organizational structure of hedge funds, VC funds, and private equity funds. How are the incentives of managers of these funds aligned with the goals of the (other) investors?

The limited partnership model of the general partnership model is the most common organizational structure for the pool of all the funds, which make up the hedge fund. The organizational structure of the venture capital funds is the general partner model. All the carried interest that is paid by the fund is paid by the entity and it is the sole decision maker of the fund. All the successor funds would usually have new general partners for paying the different allocations of carried interest. The private equity funds also use the general partner model however, most of them use the limited partnerships structure and the funds are governed by the terms that are set out in the limited partnership agreement.

The hedge fund managers receive a management fee of 2% of all the assets that are under management and they also receive 10% of all those profits that are above the high water mark. The VC fund managers receive a carry of 20% to 30% of the upside in the performance of their funds and they are also paid a management fee of 2% to 3% of the total funds that are raised and are paid annually. The managers of private equity funds receive a management fee of 2% of all the assets that are under management and carried interest of 20% and 30% are also received on outperforming portfolios.

Question 3

How do products offered to individuals by pension funds and LICOs differ from those of mutual funds? What is the outlook for each of these institutions as a growing share of the U.S work force approaches retirement?

The products that are offered by the pension funds and the LICOs are dependent on the pension payments of the investors and there are three different schemes used to structure the products, which are defined contribution scheme, defined benefit scheme and a hybrid scheme, which combines the features of the previous two schemes. On the other hand, the mutual fund products offered to individual investors allow them to invest different portfolios of different types of asset classes. For instance, investors can invest in equity funds, fixed income funds, index funds etc.

The share of the pension funds and the LICOs in the US is 79.4% as at the end of 2015. This share is a share of the gross domestic product of the country. The total share of the mutual fund assets is 15.65 trillion in dollars. The domestic equity funds have a share of 41% of the total fund market and bond funds have a share of 32% of the fund market in US.

Question 4

How would longer life expectancies affect the pricing of life insurance policies? Annuities?

The premium rates that are paid as part of the life insurance policies is determined by the sharing of the risk of the death by a large group of the people and life expectancies tend to have a major impact on the pricing of the life insurance policies. There is direction correlation between the premiums or the price of the life insurance policies and the life expectancies. The younger a person is, the more the person is likely to live. This means a lower risk for the insurance company as the person has low probability of dying in the short term. This means a longer life expectancy means a lower premium is charged by the insurance companies and the prices are lower for life insurance policies.

On the other hand, if we talk about annuities, which are a contract, in which the insurance company provides a stream of income until the death of the person or a set time period. If we take an example of the single life option annuity then the insurance company would pay payments for the expected lifetime. If the person is younger and is more likely to live longer than the annuity, payments are going to be low and vice versa.................

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