Index funds are designed to imitate the performance of benchmark market portfolios and replicate the movements of an index of a specific financial market. To achieve that, the fund purchases all the securities in the index and buys or sells investments according to the index changes aiming to always keep in line with the underlying index. One of the main advantages of index funds for investors is that they are passively managed and as such, they incur lower-than-average management fees costs and lower expense ratios than actively managed funds. Because an index composition does not change frequently, fund managers have to make fewer trades when dealing with index funds and therefore fees and taxes are lower. On the contrary, fund managers, who deal with actively managed funds, have to follow the track of the index on a regular basis in order to anticipate any changes in its composition. Consequently, fees and taxes are higher. Index funds do not incur expenses related to the stock selection. Typically, index funds use sampling and mirroring models to decide the appropriate timing to buy, hold or sell individual securities and be in agreement with the target index. However, this does not guarantee that passive management is always effective, because sampling and mirroring models are, by default, not 100 percent accurate and this justifies the occurrence of tracking errors. Index funds offer to investors a high level of diversification at a relative low cost. If investors would invest directly in stocks using the same portfolio allocation, they would probably incur significantly higher costs. Moreover, index funds are always fully invested to the particular index, which means that portfolio returns are higher during market upturns and lower during market downturns. However, investors should be aware that indexing is quite a risky investment strategy during economic downturns. Instead, an actively managed fund would consider risk as an opportunity and would outperform the index. To choose properly an index fund, investors should know which index the fund mirrors and what is the risk associated to the index. The risk/return relationship is not the same in all index funds and therefore, investors should choose an index fund that really reflects the risk that they are willing to undertake. Considering the tax effects associated to an index fund is another important consideration. A common assumption about index funds is that they are cheap because of passive management. However, some index funds incur high annual expenses and do not obtain considerable taxable gains as their gains depend on the position they sell. The most widely used index funds track the Standard & Poor’s (S&P 500) index, the Russell 2000 that tracks small companies, the MSCI EAFE that tracks the performance of foreign stocks in Europe, Australasia, and the Far East, the DJ Wilshire 5000 that measures the performance of all U. S. equity securities, and the Lehman Aggregate Bond Index that that tracks the performance of bond market. Conclusively, index funds are an investment strategy with clearly defined rules of ownership that are held constant in spite of market conditions. However, among low cost index funds, risk exposure is more important than any fees associated to the fund. Therefore, investors should primarily consider the risk associated to the fund. Risk is the uncertainty of their expected returns. If they don’t know what to expect, they won’t be able to choose the right index fund to match their risk profile.
Posts Tagged ‘Funds’
The Comeback of the Hedge Fund of Funds: London Based Hedge Fund of Funds and Investors Set the Record Straight
December 31st, 2009
London, July 7th, 2008 — Opalesque, the world’s largest subscription-based publisher covering the alternative investment industry, has just launched the seventh issue of its groundbreaking Roundtable Series: Opalesque U. K. Roundtable (download here: http://www. opalesque. com/index. php?act=static?=RoundtableUK)
Remember a couple of years ago various reports claimed funds of hedge funds were doomed because of the multi-strategy managers? The fund of funds didn’t look to good back then. This Opalesque UK Roundtable held June 5th 2008 in London offers some important updates on this discussion.
In addition, you will read:
l Which strategies work and are in demand since the credit crunch?
l Why this is not the time to go into passive investments
l For what strategies is the credit crunch actually a good environment, who is striving
l You hear a lot about that difficulty of valuing collateral – why this complaint is often without merit
l Vital points investors often overlook in discussing fees with hedge funds
l What UK based managers say about the FSA principles-based regulation
l What US investors often don’t understand about UK regulations
The Opalesque UK Roundtable was sponsored by Newedge Prime Brokerage Group (www. newedgegroup. com) and took place in their London office with the following participants:
l David Harding, Founder and CEO of Winton Capital Management
l Paul Dunning, CEO, Financial Risk Management Limited (FRM)
l Tim Haywood, CEO of Augustus Asset Managers Ltd. (formerly known as Julius Baer Investments Ltd. )
l Stephen Oxley, Managing Director PAAMCO Europe (Pacific Alternative Asset Management Company)
l Joe Leitch, Co-Founder and COO of Rubicon Fund Management
l Karsten Schröder, Founding Partner and CEO of Amplitude Capital
l Gerard Gardner, Partner, North Asset Management
l Alistair (Ali) Lumsden, Portfolio Manager, CQS Management
l Mark Salem, Managing Director of Mount Capital
l Duncan Crawford, Head of Capital Introductions, Newedge Prime Brokerage Group
l Philippe Teilhard de Chardin, Global Head of Prime Brokerage, Newedge Group
The Opalesque U. K. Roundtable Script can be downloaded here: http://www. opalesque. com/index. php?act=static?=RoundtableUK
All other previously published Opalesque Roundtable Scripts (New Zealand (March 17th), Australia (March 25th), Singapore Roundtable (April 24th), Hong Kong (May 1st), Japan (May 23rd), New York (June 11th) can be downloaded here: http://www. opalesque. com/index. php?act=archiveRT
Matthias Knab, Director of Opalesque Ltd, moderates the Opalesque Roundtables. Matthias Knab is an internationally recognized expert on hedge funds and alternatives and has frequently served as chairman of hedge fund conferences in New York, Tokyo, Shanghai, Hong Kong, Miami, Bahamas, Stockholm, Dubai etc. In addition, he has presented or moderated at hedge fund events in Sydney, Cape Town, Madrid, and Bombay, and lectured at numerous universities on the subjects of hedge funds and the state of the global alternative asset management industry.
About Opalesque:
Opalesque leads the finance media space for its in-depth and innovative products. Since February 2003, Opalesque is publishing Alternative Market Briefing, the premium news service on hedge funds and alternatives. The launch of these Briefings was a revolution in the hedge fund media space (”Opalesque changed the world by bringing transparency where there was opacity and by delivering an accurate professional reporting service. ” – Nigel Blanchard, Culross) combining proprietary news with the “clipping service” approach of integrating third party news. Each week, Opalesque publications are read by more than 400,000 industry professionals in over 100 countries.
Opalesque is the only daily hedge fund publisher which is actually read by the elite managers themselves (http://www. opalesque. com/op_testimonials. html). For more information, please go to http://www. opalesque. com.
About Opalesque publications:
Alternative Market Briefing:
A daily newsletter on the global hedge fund industry, highly praised for its completeness and timely delivery of the most important daily news for professionals dealing with hedge funds. Alternative Market Briefing offers both a quick overview and in-depth coverage. Subscribers can also access the industry’s largest news archive ( 27,000+ articles ) on hedge funds and related topics.
A SQUARE:
Opalesque A SQUARE = Alternative Alternatives is the first web publication, globally, that is dedicated exclusively to alternative investments. A SQUARE’s weekly selection feature unique investment opportunities that bear virtually no correlation to the main stream hedge fund strategies and/or distinguish themselves by virtue of their “alternative” motive – social, behavioural, natural resources, sustainable /environment related investing.
With its “research that reveals” approach, fast facts and investment oriented analysis, A SQUARE offers diversification and complementary ideas for: private, high net-worth and institutional investors, pension funds and endowments, portfolio and hedge funds managers. Technical Research Briefing:
Delivers three times a week a global perspective/overview on all major markets, including Equity Indices, Fixed Income, Currencies, and Commodities. Opalesque Technical Research is unique compared to most available research which is fundamental in nature, and not technically (chart) oriented.
Opalesque Roundtable Series:
In an Opalesque Roundtable, we unite some of the leading hedge fund managers (single and multi strategy managers) as well as representatives of the local investor base (institutions, fund of funds, advisers) to gain unique insights into the specific idiosyncrasies and developments, the issues and advantages of individual global hedge fund centers.
No matter if you are a hedge fund investor looking for new talent, a hedge fund interested in diversifying your investor base or a service provider looking for new clients, you will get to know some of the leading heads of each hedge fund center and find invaluable information and intelligence right on your desk, without any travel involved.
For more information, please go to Hedge Funds News | Alternative Investment News
