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1、1,2. Hedge Funds An unregistered investment company that pools resources from wealthy individuals and FIs which invest the funds on their behalf. Manager is paid 1 or 2% of fund assets, and 20% to 40% of profits realized by the funds investment strategy. Investors: Wealthy individuals, pension funds
2、, insurance companies, university endowment fund Less regulated than MFs. Hedge Funds suffered heavy loses during 2008 According to Hedge Fund Research About 700 funds closed in the first three quarters of 2008 (up over 70 percent from the same period last year) The average hedge fund lost 18 percen
3、t of its value in 2008 HF along with investment banks, exchange traded funds, money-market funds and pension funds (shadow banking system) invested heavily in securitized products (e.g., mortgage backed securities). In the U.S. the shadow banking system has provided about 80% of total lending since
4、1992. Strategies of HF Non-directional. Long and short position in assets Opportunistic: Possible assets mispricing (LTCM. See next slide) Event-driven: Potential mergers.,2,Long Term Capital Management collapse (1998),LTCM wanted to take advantage of unusual spreads between bond prices Corporate bo
5、nds and T-bonds usually follow systematic pattern Then their prices start to diverge LTCM sees this as a mispricing: Sells short T-bonds and buys long Corp bonds However, the opposite occurred: the spread between the prices of T-bonds and Corp. bonds increased!,July 1998,Corp bonds,T-bonds,LTCM expe
6、ctation,3,3. Pension Funds: Introduction,Pension Fund. Fund set up by a corporation, labour union, government entity, or other organization to pay the pension benefits of retired workers. The pension fund is a legally separate entity (a separate account within a firm or a corporation) Pension Funds
7、are run by Asset Managers (firm managers or other FIs; with help of actuaries and other advisers) Pension Funds are currently very active in monitoring firms performance due to their increasing controlling share ownership. They reduce Agency problems between managers and shareholders,5,Employer-spon
8、sored (contd) Trusteed Pension Plans Asset Manager (Trustee) Insurance Companies, trust companies, banks, Investment banks, specialized fund manager They hold and manage the funds assets according to specified guidelines for a Fee. Largest Pension funds in Canada Ontario Teachers Pension Board and O
9、ntario Municipal Employees Retirement Board. Largest Pension Fund Manager (discretion to manage funds): Caisse de depot et placement du Quebec With the exception of vested assets, which maybe withdrawn by an employee and placed into a restricted RRSP, the assets of pension funds are only withdrawn t
10、o meet payments to beneficiaries (p 105),6,Types of Trusteed Pension Plans Defined Contribution Plan. It provides, at retirement, whatever pension income is available based on accumulated contributions and investment returns. Each employee has an account into which the employer and the employee (in
11、a contributory plan) make regular contributions. Contributions from both parties are tax-deductible, and investment income accrues tax-free. The employee bears all the investment risk. The retirement account is by definition fully funded. A defined contribution plan is less risky for the company, bu
12、t could leave retirees with lower pensions.,7,b) Defined Benefit Plans. It provides guaranteed income to workers in retirement no matter what happens in the financial markets. Each employees pension benefit entitlement is determined by a formula that takes into account years of service for the emplo
13、yer and, in most cases, wage or salary. (See example on next slide) Employer absorbs the investment risk.,8,Numerical examples of a typical Defined-Benefit plan. A typical DB plan determines the employees benefit as a function of both years of service and wage history. As a representative plan, cons
14、ider one which the employee receives retirement income equal to 1% of final salary (or average of three last years), times the number of years of service. Example 1. Assume an employee retires after 40 years of service with a average salary of 60,000 per year. What is his retirement benefit? Assume
15、the following Actuarial Defined Benefit model retirement per year Retirement per year= 0.01*(Avg salary last three years)*(# years worked) A: Retirement benefit per year = 0.01*$60,000*40 = $24,000,9,Example 2: Assume an employee is 40 years old and has been working for same firm as above for 15 yea
16、rs (same salary). If normal retirement age is 65, the interest rate is 8%, and the employees life expectancy is 80, what is the present value of the accrued pension benefit? A: Annuity promised (at retirement) = 0.01*60,000*15=$9,000 PV accrued Pension benefit = $9,000*(P/A,8%,15)(P/F,8%,25) = $9,000(8.5595)(0.1460) = $11,247,10,Decreases in interest rates a big problem for Private Pension Funds Why many Canadian Private Sponsored funds (Defined-Benefit Plans) are curren
