Investment Management Essay Example for Free

Investment Management turn upBoth remit funds and mutual funds are pooled instruments, but there are more than differences than similarities amidst them. Three kinds of differences are going to introduce in the following part which are strategy, take a chance and reward. Strategy The hedge funds managers pass water fewer traps to deal with, they canful apportion short, usance derivatives and use leverage, and otherwise, they can also change the strategy significantly if they think it is appropriate. The mutual fund managers cannot be as flexible as hedge fund managers. In case they changes the strategy of the fund, the may be charge of style drift.Risk As hedge funds are managed much more vulturine than the mutual fund, they can take speculative positions in derivative securities and receive the ability to short sell stocks. This will obviously increase the leverage and the assay of the fund. Mutual funds are the opposite of the hedge funds, taking toweringly leve raged positions is not allowed and managers should take solid strategy to make the funds safe. Reward sidestep funds take an aggressive strategy which has high risks to search absolute turn ins (it means they want to convey positive return no matter what the market performance is).Mutual funds are managed copulation to an index benchmark which means their return is steady because they are judged on their variance from that benchmark. 3. Arbitrage chance 3. 1 According to the case study, during the IPO of Ubid, there is only 20% equity offer to public, and rest 80% will distribute to CCs shareholders after 6 months. The arbitrage opportunity is advance because if we own CCs share that we will receive Ubids share after sextette months. In that reason, we should form a portfolio which combines capacious position of CC and short position of Ubid.In descent 9, there was 10,238,703 CCs share outstanding and 9,146,883 Ubids share outstanding. However the 80% of Ubids share will distributed to CCs shareholders after 6 month of IPO. In that reason, we can presume that 80% of Ubids share is subjected to CCs share. (10,238,703? 80%)/9,146,883=0. 715 If we have long position on 1 share of CC, we should take 0. 715 short position of Ubids share. 3. 2 Based on the yield in section 3. 1, the arbitrage opportunity has arise when we have 1 long position on CCs share and 0. 15 short position on Ubids share. Therefore we bring short sell the Ubids share and buy CCs share. Assume that we buy 1 share of CC and short sell 0. 715 share of Ubid. After 6 months later. In addition, after 6 months, the 80% Ubids share will distribute to CCs shareholders, therefore, after 6 months we have 1 share of CC will receive 0. 715 share of Ubid. Subject to 1 share of CC, we have 0. 715 share short position of Ubid. In that reason we will have a portfolio that combine 1 long position of CC and 0. 715 short position of Ubid.The total payoff of portfolio is sum of payoff in both positio n is Price of CC after six month outlay of CC + 0. 715? expense of Ubid. As we mention before, our return is the total payoff of portfolio. According to the equation of payoff of portfolio, even the price of CC is drop to Zero, we also will generate positive return which is price difference between Ubid and CC, and this is our minimum return Price difference of Ubid and CC is 0. 715? 35. 6875-22. 75=2. 767 and the initial margin is 50% for long and short position, therefore the capital required is 50%? 2. 75+50%? 35. 6875=29. 22. The minimum rate of return is 4. Risks in arbitrage The arbitrage means that investors find temporary risk-free profit from misprice at unable market. Therefore, arbitrageurs will face risk lower than other investors. However, some of risks can limit arbitrageur to seek risk free profit. Firstly, arbitrageurs need to bear the fundamental risk. Although arbitrageurs can eliminate unsystematic (firm-specific) risk by portfolio diversification, they cannot mitigate systematic risk which arises from market contracture.This lead to some of bad news or policies can cause negative effects on fundament value and arbitrageurs profits. Thus, the fundamental risk can limit arbitrageurs to invest in inefficient market. Secondly, preventive trader risk will limit arbitrage. High percentages of noise traders who make irrational investment of decision in market will lead price and risk level to be different with expected level for arbitrageurs, and cause misprice to be reduced. Thus the profit of arbitrage will be limit by noise trader risk. Finally, arbitrageurs will also face high implement represent. Implement cost includes commission, bid-ask spread, price impact, short sell cost and identification cost. High cost will cause arbitrageur loss interest on seeking misprice in inefficient market.