Funds: Hedge and Mutual- Who and What They Are Essay -- Finance Financ

Funds: Hedge and Mutual- Who and What They Are Ever since their creation in 1949 by A. W. Jones, hedge funds have been widely regarded as a unique and luring alternative to investing ones money. Some have seen them as a replacement to the well-known mutual fund- while others believe that they are an entirely new domain. Besides defining both the hedge fund and mutual fund, this paper aims to expose the answer to a deeper question: Are hedge funds REALLY different than a mutual fund, and if so, how and why? By comparing both financial intermediaries in the areas of structure, strategy, and their respective environments, it is my hope that I can unmask any uncertainties that may reside within these financial institutions. The most basic question that must first be answered in this type of paper is the most obvious: what is a hedge fund, and how or what is it made up of? Mishkin describes a hedge fund as a special type of mutual fund - which on a very basic level is correct. But here we must be careful, while mutual funds are referred to as â€Å"public† hedge funds are referred to as â€Å"private.† This opens a portal of regulatory issues between the mutual fund and hedge fund entities. Mutual funds, and there thousands of them in the United States alone, are among the most highly regulated financial intermediaries. Thus they are subject to a very large number or requirements that insure that they act in the best of interests of their â€Å"public† shareholders. To digress only briefly, it is important to mention the importance of regulatory enactments since the early twentieth century because they have an enormous impact on today’s companies. Four of the most influential acts include the Securities Act of 1933, the Securities ... ...r risk factors, but take bets on relative price movements utilizing strategies such as long–short equity, stock index arbitrage, convertible bond arbitrage, and fixed income arbitrage. Long–short equity funds use the classic A.W. Jones model of hedge funds, taking long and short positions in equities to limit their exposures to the stock market. Stock index arbitrage funds trade the spread between index futures contracts and the underlying basket of equities. Convertible bond arbitrage funds typically trade the embedded option in these bonds by purchasing them and shorting the equities. Fixed income arbitrage generally refers to the trading of price or yield along the yield curve, between corporate bonds and government bonds of comparable characteristics, or more generally between two baskets of similar bonds that trade at a price spread.† [Fung and Hsteh, p. 319-320]