Question 1
Finance is a discipline that describes creation and management of money, credit, assets, liabilities and investments. The creation and management of the various elements in finance are governed by various laws. Most financial assets and liabilities are created through contracts. Lawyers have to be involved in formulating and enforcing contracts in various finance platforms. Therefore, lawyers need to understand finance in order to understand to know how to formulate contracts in finance, interpret existing contracts as well as advise their clients as regards their rights and obligations that arise from financial contracts. The law affects finance from a legal perspective in the sense that the law is the basis upon which financial contracts and by extension financial assets are created. From an investment perspective, the existing laws and Acts that govern a given assets class may have a bearing on the risks of the assets as well as its returns.
Question 2
Performance alone is not the best way to judge a fund. Evaluating the performance of a fund is multi-faceted. This is because current performance may not be replicated in the future. Therefore, it is important to look at the current performance, as well as the volatility of the performance in future. In addition, comparing performance with other funds is equally important to determine the fund with the highest performance. First, it is vital to compare the performance of the firm with its index as well as with its peer group. If the fund outperformed its index and peers, then it is a high-quality fund. Secondly, evaluation of the fund historical performance to determine the riskiness of the fund is important in assessing the riskiness of a fund. There are various measures of risk such as standard deviation, Sharpe ratio and Treynor ratio. Evaluating historical performance also shows the professional capability of the fund managers. Therefore, risk and return evaluation is the best framework for evaluating the quality of a fund.
Question 3
Hedge funds are investment vehicles that pool together resources from different investors for the purpose of investing in financial securities in order to earn a return. Hedge funds are usually set up as limited partnerships. There are five main types of hedge funds; equity hedge, managed futures, global macro, event-driven and relative value. Equity hedge invests in equity securities by taking short and long position depending on the returns and risks of the security. Event-driven funds make investments geared towards cashing on market events that are likely to distort prices such as a merger, political turmoil or share-split. Global macro invests in futures and options as well as currency trading aimed at exploiting systematic changes in global non-financial markets, equity and bonds markets. Managed futures exclusively take long and short position in futures and options contracts for commodities, interest rate, currencies and equity. Relative value funds seek to exploit differences in prices to make a return by looking for undervalued and overvalued financial securities. Relative value, equity funds and event-driven funds rely on arbitrage strategy. Global Macro and managed futures funds invest in futures and options contracts. Therefore, they are both based on developing expectations on the market and economic themes. However, global macro is discretionary whereas managed futures usually takes numerous small positions.
Question 4
Private equity is investment capital by high net-worth institutions and individuals provided to unlisted firms. There are four main types of private equity; venture capital, growth capital, buyout and development capital. Venture capital provide equity funds by making a long-term investment in start-up companies that show high potential. Growth capital makes equity investments in established that need extra funds in order to expand. Development capital is also an investment in equity of established companies. Buyout entail equity investments aimed at acquiring the majority of the shares in a company. Venture capital targets companies at the introduction phase of product life cycle (PLC) while growth capital target firms at the growth phase. Both development capital and buyout target firms in the mature phase. However, development capital entails acquiring a non-controlling stake while buyout entails acquiring a controlling stake.
Works Cited
Fraser-Sampson, Guy . Private Equity as an Asset Class. New York: John Wiley & Sons, 2011.
Man Group Plc. An Introduction to Hedge Funds . London: Man Group Plc., 2015.
