Professional Documents
Culture Documents
FUNDS
12b 1 funds
• Mutual funds that do not charge an upfront or back-end commission, but instead
take out up to 1.25% of average daily fund assets each year to cover the costs of
selling and marketing shares, an arrangement allowed by the SEC's Rule 12b-I
(passed in 1980).
• The beta of a fund is determined as follows: [(n) (sum of (xy)) ]-[ (sum of x) (sum of
y)] [(n) (sum of (xx)) ]-[ (sum of x) (sum of x)] where: n = # of observations (36
months) x = rate of return for the S&P 500 Index y = rate of return for the fund.
• The measure of a fund's or stocks risk in relation to the market. A beta of 0.7
means the fund's total return is likely to move up or down 70% of the market change;
1.3 means total return is likely to move up or down 30% more than the market. Beta
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is referred to as an index of the systematic risk due to general market conditions that
cannot be diversified away.
• Are investment vehicles that invest in futures and options on futures. Commodities
can include the tradition grains, metals, and livestock as well as stock indices,
currencies, and other financials.
• Generally look to purchase the bonds or preferred securities and sell common
shares against these long positions. The intent is to hedge interest or dividend
paying securities with low or no dividend common shares. In the event of a default
the bonds and other securities have priority to the common shares. Also, the bonds
or preferred stocks usually generate positive cash flows whereas the short positions
are generally not responsible for dividend payments. Therefore the fund should have
a positive cash flow and protected by relative seniority position in corporate
securities. These funds also use warrants and options as portfolio instruments.
Cost of funds
• Is a benchmark used for resetting the coupon rate on an adjustable rate mortgage.
Frequently, this is based on the cost of the 11th District Federal Home Loan
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• Invest in securities and derivatives which go across borders. These funds try to
capitalize on interest rate differentials between currencies, varying investment
climates for different countries, relative volatilities in equity or credit markets, and
variations of the other hedge fund themes.
• Narrow their investment horizon to issues in markets which are not as mature or
liquid as the previous group. However, these less developed markets are believed to
offer greater risk adjusted rates of return. A general perspective is akin to getting in
on the ground floor.
Endowment funds
• Try to long position themselves in stronger or outperform issues while selling short
weaker or poorer prospect securities. Variations of this are: trading large cap issues
versus small caps; using derivatives for enhanced returns; specializing in program
trading; or using leverage to magnify returns.
• Under the judgmental approach for developing a pro forma balance sheet, the
amount of external financing needed to bring the statement into balance.
Fed funds
Federal funds
• Loan transactions between commercial banks in which the Federal Reserve banks
become involved.
• The market where banks can borrow or lend reserves, allowing banks temporarily
short of their required reserves to borrow reserves from banks that have excess
reserves.
• This term refers to interbank borrowings or the amounts the banks borrow from
each other. These liabilities are not subject to reserve requirements or deposit
insurance. They are short- term uncollateralized loans. More than 90% has a
maturity of 1 day. Costs reflect supply and demand. Subject to large volatility on the
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• This is the interest rate that banks with excess reserves at a Federal Reserve
district bank charge other banks that need overnight loans. The Fed Funds rate, as it
is called, often points to the direction of U.S. interest rates.
• The rate of interest charged by banks for short-term OVERNIGHT to other banks.
The Federal Reserve Bank through open-market operations establishes this rate.
• The interest rate charged by one institution lending federal funds to another.
• Abbreviated FFO. Used by Real Estate Investment Trusts (REITS) to define the
cash flow from their operations. It is calculated by adding Depreciation and
Amortization expenses to earnings, and can be represented as Funds From
Operations Per Share (FFO/S). FFO/S should be used in lieu of EPS when
evaluating REITs and other similar investment trusts.
• Abbreviated FFO. Used by real estate and other investment trusts to define the
cash flow from trust operations. It is earnings with depreciation and amortization
added back. A similar term increasingly used is Funds Available for Distribution
(FAD), which is FFO less capital investments in trust property and the amortization
of mortgages.
Good funds
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• A market expression for immediately available money, that is, Fed funds.
• Are those which are more benchmark or index oriented. They tend to be top-down
in approach rather than bottom-up. These Macro Hedge Funds employ strategies
using actual securities, commodities, currencies, futures, and derivatives. They also
use various degrees of leverage to try to outperform the market or benchmark
indices.
• Generally focus on being long the actual mortgage backed securities and short
some proxy such as TBAs (To Be Announced), futures, Treasuries or derivatives.
These funds typically purchase highly rated agency paper, CMOs, or REMICs and
finance the positions in the repo market. This financing can often result in gross
asset, principal or market values of $10 billion for an initial cash/equity position of $1
billion dollars. In some respects it is comparable to buying a house with borrowed
money. It is the borrowing which magnifies the performance. If the market quickly
jumps 10 percent higher, then the buyer doubled his investment. Here, it would be
10 percent of $10 billion or a $1billion profit against an initial capitalization of $1
billion. However, if the market declines by 10 percent, then the original investor is
out. If the market went down 25 percent, then the original investor is gone but the
lending institution (bank or brokerage firm) is on the-hook for $1.5 billion. Effectively,
this is what has been recently occurring in the financial industry. The lenders are
becoming defacto new investors, holding losing positions, because of defaults.
Mutual funds
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• Investment companies that receive cash from individuals for investment in both
money and capital market securities.
• The fund's investment strategy category as stated in the prospectus. There are
more than 20 standardized categories.
Pension funds
• Are combinations which are analogous to Balanced Mutual Funds but, depending
on the underlying charter, can use higher degrees of leverage or derivatives.
Surplus funds
Target funds
• Are mutual funds which invest in specified categories, such as, average maturities
or durations.
Unlimited funds
• The financial situation in which a firm is able to accept all independent projects that
provides an acceptable return.
Value funds
Vulture funds