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    Financial Institutions 21

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    adrien_ducaillou
    This document discusses various types of financial institutions including mutual funds, exchange traded funds, pension funds, hedge funds, and banks. It notes that mutual funds and exchange traded funds allow individuals to invest in a diversified portfolio. Pension funds are retirement plans funded by employers and invested in stocks, bonds, real estate. Hedge funds have high-wealth individual investors and engage in riskier strategies than mutual funds. The document outlines the history of deregulation of financial institutions in the 1980s and 1990s, which has led to large financial services corporations that provide banking, investment, and insurance services.

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    Financial Institutions 21

    Uploaded by

    adrien_ducaillou
    23 views1 page
    This document discusses various types of financial institutions including mutual funds, exchange traded funds, pension funds, hedge funds, and banks. It notes that mutual funds and exchange traded funds allow individuals to invest in a diversified portfolio. Pension funds are retirement plans funded by employers and invested in stocks, bonds, real estate. Hedge funds have high-wealth individual investors and engage in riskier strategies than mutual funds. The document outlines the history of deregulation of financial institutions in the 1980s and 1990s, which has led to large financial services corporations that provide banking, investment, and insurance services.

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    This document discusses various types of financial institutions including mutual funds, exchange traded funds, pension funds, hedge funds, and banks. It notes that mutual funds and exchange traded funds allow individuals to invest in a diversified portfolio. Pension funds are retirement plans funded by employers and invested in stocks, bonds, real estate. Hedge funds have high-wealth individual investors and engage in riskier strategies than mutual funds. The document outlines the history of deregulation of financial institutions in the 1980s and 1990s, which has led to large financial services corporations that provide banking, investment, and insurance services.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    23 views1 page

    Financial Institutions 21

    Uploaded by

    adrien_ducaillou
    This document discusses various types of financial institutions including mutual funds, exchange traded funds, pension funds, hedge funds, and banks. It notes that mutual funds and exchange traded funds allow individuals to invest in a diversified portfolio. Pension funds are retirement plans funded by employers and invested in stocks, bonds, real estate. Hedge funds have high-wealth individual investors and engage in riskier strategies than mutual funds. The document outlines the history of deregulation of financial institutions in the 1980s and 1990s, which has led to large financial services corporations that provide banking, investment, and insurance services.

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    Financial Institutions 21

    type of mutual fund, the exchange traded fund (ETF), allows investors to sell their share at any time during normal trading hours. ETFs usually have very low management expenses and are rapidly gaining in popularity. 9. Traditional pension funds are retirement plans funded by corporations or government agencies for their workers and usually administered by the trust departments of commercial banks or by life insurance companies. Pension funds invest primarily in bonds, stocks, mortgages, and real estate. Many companies now offer self-directed retirement plans, such as 401(k) plans, as an addition to or substitute for traditional pension plans. In traditional plans, the plan administrators determine how to invest the funds; in self-directed plans, all individual participants must decide how to invest their own funds. 10. Hedge funds raise money from investors and engage in a variety of investment activities. Unlike typical mutual funds, which can have thousands of investors, hedge funds are limited to a relatively small number of high-wealth individuals or institutional investors. As such, hedge funds are much less regulated than mutual funds. The first hedge funds literally tried to hedge their bets by forming portfolios of conventional securities and derivatives in such a way that they limited their potential losses without sacrificing too much of their potential gains. Most hedge funds also levered their positions by borrowing heavily. During the early and mid-1990s many hedge funds had spectacular rates of return. This success attracted more investors and more hedge funds were created. Much of the low-hanging fruit had already been picked, so many hedge funds began pursuing much riskier (and unhedged) strategies. Perhaps not surprisingly (at least in retrospect!), some funds have produced spectacular losses. For example, many hedge fund investors suffered large losses in 1998 when the Russian economy collapsed. That same year, the Federal Reserve had to step in to help rescue Long Term Capital Management, a high-profile hedge fund whose managers included several well-respected practitioners as well as two Nobel Prizewinning professors who were experts in investment theory.6 With the notable exception of hedge funds, financial institutions have been heavily regulated to ensure the safety of these institutions and thus to protect investors. Historically, many of these regulationswhich have included a prohibition on nationwide branch banking, restrictions on the types of assets the institutions could buy, ceilings on the interest rates they could pay, and limitations on the types of services they could providetended to impede the free flow of capital and thus hurt the efficiency of our capital markets. Recognizing this fact, policymakers took several steps during the 1980s and 1990s to deregulate financial services companies. For example, the barriers that restricted banks from expanding nationwide were eliminated. Likewise, regulations that once forced a strict separation of commercial and investment banking have been relaxed. The result of the ongoing regulatory changes has been a blurring of the distinctions between the different types of institutions. Indeed, the trend in the United States today is toward huge financial services corporations, which own banks, S&Ls, investment banking houses, insurance companies, pension plan operations, and mutual funds, and which have branches across the country and around the world. For example, Citigroup combines one of the worlds largest
    6See

    Franklin Edwards, Hedge Funds and the Collapse of Long Term Capital Management, Journal of Economic Perspectives, Spring 1999, 189210 for a thoughtful review of the implications of Long Term Capital Managements collapse.

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