Investment Products

When it comes to investing money as a private investor, you can be part of one of two categories based on your level of net worth:

  • a ‘regular’ type of investor who has less than 1 million $ to put in the market

  • a ‘high-net-worth individual’, with at least 1 million $ in financial assets to invest

For most of us belonging to the first category, investments are done on a collective basis by financial institutions (such as banks) acting as intermediaries between the investor and financial markets. This means that the money of different people with less than 1 million $ invested are ‘batched’ together (so to increase the amount invested by the financial institution, dispose of a wider array of investment options and generate a potentially higher return).

A different approach is reserved to high-net-worth individuals, who have access to private banking. These people have direct contact with the asset management firm, which will take care of their portfolio on a segregated basis maximising the investor's financial characteristics.

Most common collective investment products

  • Open-End Mutual Funds

Open-end mutual funds are financial instruments managed by asset management firms with the characteristic of having a very diverse asset allocation, which means that their content is diversified into many different securities in order to cater for as many people as possible. Corporations issuing open end mutual funds must release a prospectus where all the information on the company and the instrument issued are described.

The main characteristic that makes open end mutual funds stand out is the possibility for investors to enter or exit from it freely at any moment, also basing their decision on the Net Asset Value of the fund published everyday on the news. What's more, when you decide to exit from the fund, you don't need to find a buyer to whom sell your investment.

When investing in open end mutual funds, investors pay 4 main fees to the asset management firm:

  1. management fee, calculated on the wealth invested and paid yearly

  2. Entry fee, a flat fee paid once either when you enter or when you exit the fund

  3. Performance Fee, which is a fee paid as a prize for the asset manager in the case he outperforms the market (must be written in prospectus)

  4. Other costs such as brokerage fees and lawyer service

  • Life Insurance

    Life Insurance companies invest the premium paid by customers on a pool basis. The main advantage of insurance companies is that they are very liquid, as they receive the premium directly and before incurring any costs. So their activity consists of making profits through investments. Contrarily to open-end mutual funds, life insurance investments cannot be cashed out or bought in freely by customers.

  • Pension Funds

    Pension Funds are financial instruments where people invest money in order to make sure they'll have a pension in their retirement days. While in Italy and pretty much all around Europe pension fund schemes are mandatory and automatically invested by the company on behalf of the employees subtracting an amount of money from the paycheck and giving that to dedicated institutions, in the Usa this is not the case. So, there are private pension funds companies in which people can voluntary choose to invest money in so to have enough money during their retirement. Cal Pers is the most used pension fund in California and it is a very big pension fund overall.

    A worthwhile note to underline is that public pension fund schemes are being highly challenged by demographics, which, due to negative or almost negative birth rates and the life of people becoming increasingly longer, have to pay pensions for a longer time than what they used to. The rational choice is therefore to stretch the threshold at which people retire, which creates, however, a lot of frustration among populations.

  • Real Estate Funds

    The real estate market has a very high barrier of entry, as real estate costs a lot. The diversification of the portfolio is a common factor for real estate investors who can delegate the management of their money to asset managers, who will invest it in a pool, collecting the money of rents and selling the property if that yields a profit. So, the main downside of real estate investments is the lack of liquidity, as the process of selling properties and collect the money takes a lot of time. In addition, investors are not allowed to cash out at any moment.

  • Closed-end funds

    These type of funds are long-term investments where the money invested will yield a return only at maturity of this financial instrument (usually 12 to 15 years). There's no possibility to buy in and cash out freely from closed end funds, so the money invested is 'frozen' for the whole duration of the fund, which makes closed-end funds unappealing to households generally speaking (due to illiquidity).

    There are 2 types of closed-end funds:

    • Private Equity firms, investing money in companies' equity (both listed and unlisted companies). Typically, private equities invest money in small and medium businesses, aiming at exponentially growing the company and cash out at maturity of the fund making a profit. This process is done with numerous entreprises at the same time. The most succesful private equity firms are usually small corporations rather than big banks.

    • Venture Capital Firms, that invest money in start ups, betting on a high risk investment which very often fails.

  • Hedge Funds

    Hedge Funds are the outliers of the investing game; they are financial corporations having a much higher degree of freedom on investments compared to regular asset management companies. Indeed, in order to do what a hedge fund does, there must be a specific hedge fund company, which means that asset management businesses cannot do what hedge funds do.

    Firstly, hedge funds have no limit to invest in Derivatives, which are financial securities with a value which is reliant upon or derived from an underlying asset or group of assets.The main derivatives are future contracts, forwards, options and swaps. They can be used either as a form of protection (also allowed for open end mutual funds) or of speculation.

    Secondly, there is a difference with other asset management firms in the Position of the investments: while open end funds are only allowed to trade long positions, meaning cashing out at a higher price than the purchase price of the stock at a certain time, Hedge funds are also conceded the possibility to hold short positions, which means that they owe the stocks to someone, but do not actually own them yet so they bet on the fall in price of those stocks in order to pay the lender a lower price and make a profit.

    Thirdly, leverage is allowed for Hedge funds (not for open end funds). Leverage is debt, which can be raised by hedge funds through bank loans in order to increase the amount of money invested and so amplify the potential profit or loss on the investments. They manage to get loans from banks because they use investors money and assets as collaterals in the case of default.

    To sum up, Hedge funds have a higher degree of freedom when it comes to invetments choices, but it must be pointed out that they also have constraints established by the law:

    • There are high thresholds as to the minimum amount of money that an investor can invest through a hedge fund, which make only high net worth individuals be customers of those financial institutions

    • regular asset management companies can't do hedge funds activities but there must be a dedicated company being a hedge fund.

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