Over the last several years, the total number of investment options that investors have available to them, have increased dramatically. This is evident in the overall increase in the number of private equity funds, hedge funds and mutual funds. For example, the total number of private equity deals that were completed in the year 1970 was a total of 12 transactions accounting for $13 million of investment capital. In 2007, this number of transactions increased 2, 247 and accounted for a total of $70 billion in investment capital. (Shapiro, 2008) This is significant because it underscores the overall shift in the way that investors can make money, in an economy that is increasingly becoming more globalized. As a result, the prudent investor has a detailed understanding of the different investment vehicles available to them. Where, knowing how each one works can help to improve the overall returns of the investment strategy that is being utilized. To achieve this objective requires a careful understanding between the different asset classes of: private equity funds, hedge funds and mutual funds. Where, examining the way that each one works, when to most effectively utilize them and real world examples of the various investments; will provide the greatest insights at to differences in valuations between the three. Together, these different elements will highlight how all three investment vehicles are being increasingly used by a number of different investors around the world.
Private Equity Funds
A private equity fund is when a group of investors will pool their money together to purchase those companies that have been facing tremendous financial difficulties. Where, the private equity firm will seek to buy the business, then, the...
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Shapiro, R. (2008). The Role of Private Equity in the US Capital Markets. Retrieved April 5, 2010 from Private Equity Council website: http://www.privateequitycouncil.org/wordpress/wp-content/uploads/pec-study-role-of-pe-in-capital-markets-10-16-08-final.pdf
Thomas, M. (2006). Key Differences Between Hedge Funds and Private Equity Funds. Retrieved April 5, 2010 from All Business website: http://www.allbusiness.com/personal-finance/investing/4069648-1.html
The purpose of this paper is to provide a summary of the article called “Can We Keep Our Promises?” by Robert D. Arnott, and to help better understand the three key risks facing each investor.
...ial for these private equity funds to move from not meeting expectations to meeting expectations and consequently exceeding expectations, but that is highly contingent on the future macroeconomic landscape and future credit markets. With a heavy concentration on mid-size buyout funds, private equity managers have a heavy dependence on the ability to utilize leverage and refinance their underlying investments. The 2009 financial crisis created portfolio drag in mid-sized buyout funds that can be seen throughout this portfolio. This is due to a number of capital intense and over-leveraged investments that are, or have been, in default in the last few years. If macroeconomic conditions and credit markets continue to develop we could see underlying positions improve. This would allow for the transition from not meeting expectations to potentially exceeding expectations.
Equity capital represents money put up and owned by shareholders. This money can be used to fund projects and other opportunities under the auspice of creating greater value. This type of capital is typically the most expensive. In order to attract investors, the firms expected returns must consummate with the associated risk ("Financial leverage and,"). To illustrate this, consider a speculative oil drilling operation, this type of operation would require higher promised returns than say a Wal-Mart in order to attract investors. The two primary forms of equity capital are 1) money invested into the business for an ownership stake (i.e. stock) and 2) retained earnings from past profits used to fund future growth through acquisitions, expansions and product development.
Mutual funds are investments that contains pools of individual stocks or bonds which are specifically chosen by a fund manager or team1. Exchange-traded funds or ETFs are offshoots of mutual funds that allow investors to trade index portfolios1. While ETFs maintain a lot of the characteristics of mutual funds – including the fact they are a pools of investments, have low costs, and have benefits such as the ability to achieve diversification and asset allocation – ETFs offer advantages that mutual funds cannot.
The overall mentality of the business approach of investors dramatically changed from investing through business models and principles to a “gold rush” (Senn, 2000) similar to the way things occur before the stock market closes today. Many people believed that the “new economy” businesses would become the blue-chips of the future. It is note-wor...
The aim of this report is to evaluate and validate passive investment strategies and advantages of having index funds in the portfolio. The importance of passive investment strategy is initially justified with the help of theory on efficient markets. The report then provides evidence that indexing still is a vital aspect of investment strategy and is not influenced by the efficient market theory. The report also gives a brief overview on how investors utilize indexing to minimize transaction cost by replicating the market index in their portfolio. Further, the success of indexing in US, UK and bond markets is highlighted with the help of evidence from past research on passive investment strategies. The later section of the report provides brief introduction of behavioral finance and how psychological biases affect investor’s behavior and prices. It also provides its contrasting viewpoint with respect to the Efficient Market Hypothesis (EMH) and analyzes the effects of mispricing on average returns achieved by investor.
Unlike a game of Monopoly, investing is not something a person can simply roll the dice and walk away from. Moreover, investing possesses two possible outcomes. For starters, investing can make someone extremely rich. On the other half, investing can bring someone into a complete state of poverty. Moreover, the similarities among investing and gambling remaining apparent. Furthermore, both of these things remain a high-risk endeavor. Moreover, neither one of these things can guarantee a victory. With that being said, some investors manage to defeat the odds and become wealthy. In particular, these investors include Warren Buffett and Timothy Armour. For those unaware, these investors have managed to obtain an insurmountable amount of wealth.
Investors familiar with the saying “don’t put all your eggs in one basket”, can comprehend the rationale behind the modern portfolio theory, pioneered by Harry Markowitz (1952). This is one of the most significant and influential economic theories in investment and finance. The theory was further developed by William Sharpe (1966) who along with Merton Miller, the three were awarded the Nobel Prize in Financial Economics in 1990.
Adelman, P. J., & Marks, A. M. (2010). Entrepreneurial finance. (5 ed.). Bedford, Texas: Prentice Hall.
Graham and Harvey surveyed the CFOs of 392 U.S. firms and found that when estimating the capital of assets,73.5% of respondents use the CAPM.( Graham, J. R., and C. R. Harvey,2001) It is a model which uses simple formula to evaluate asset pricing and investor behavior. This model is absolutely the method with most investors used, but many financial experts raise an objection to the veracity of this method in the recent years. Later in the main body of the essay will discuss these questions. In the first part of the essay will introduce the CAPM and the main factor of this method. Secondly, is the discussion of the uses and limits of the CAPM while evaluating the potential investment of a firm 's
The country’s highly tuned legal regulatory framework has allowed it become Europe’s leading investment fund center. Due to this those that would like to market their investment funds on a global scale have turned to Luxembourg as the country focuses on the administration and cross-border distribution of investment funds. The types of investments that can be made include banking services (that focus in international loans and capital markets activity, financial engineering, structured products, private banking and financial services for large and medium-sized businesses), renminibi businesses, investment vehicles, Insurance & Pensions, and microfinance
However there are consequences which privately equity funds additionally tend to aim to maximise their returns by an increase on efficiencies and cutting prices during the short run as where they control a company. In resulting of cost cutting which would occur towards unfavourab...
In addition, this study can help managers and investors to plan their investments so that they can sustain and maintain competitive in the market. This study also shed light to the audience
This essay is concerned with understanding the key issues relative to portfolio analysis and investment. The scope of this essay will be limited to the U. S. Stock markets only. This essay will be built upon extant portfolio theory and will discuss different types of risks that investors might face and how they go about managing such risks. Under consideration will be topics such as efficient frontier and optimal portfolios as well as their relevance to investment theory, under the assumption of direct investment in the stock market.
This assignment is concerned with your understanding of the key issues relative to portfolio analysis and investment. In completing this assignment you are to limit your scope to the US stock markets only. Use the Cybrary, the Internet, and course resources to write a 2-page essay which you will use with new clients of your financial planning business which addresses the following issues and/or practices: