25721 Investment Management
1. Case background:
July 6, 1998
| Creative Computers decided to carve-out the Ubid subsidiary
| Creative Computers planned to sell 20% of Ubid’s equity and keep 80% to shareholders in a tax-free spin-off six months after Ubid’s IPO.
| December 3,1998
| The Ubid IPO took place
| Creative Computers sold 1.817 million shares at $15 per share
| December 9,1998
| Elena King contemplated her first investment before market close and Creative Computers was trading at $22.75 and Ubid was at $35.6875
| Elena had raised $20 million for her new fund
2. Investing in hedge funds
Both hedge funds and mutual funds are “pooled” instruments, but there are more differences than similarities between them. Three kinds of differences are going to introduce in the following part which are strategy, risk and reward. Strategy: The hedge funds managers have fewer limits to deal with, they can sell short, use 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 accused of “style drift”. Risk: As hedge funds are managed much more aggressive than the mutual fund, they can take speculative positions in derivative securities and have the ability to short sell stocks. This will obviously increase the leverage and the risk of the fund. Mutual funds are the opposite of the hedge funds, taking highly leveraged positions is not allowed and managers should take solid strategy to make the funds safe. Reward: Hedge funds take an aggressive strategy which has high risks to seek absolute returns (it means they want to produce positive return no matter what the market performance is). Mutual funds are managed relative to an index benchmark which means their return is steady because they are judged on their variance from that...
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