Financial Terms related to Funds This document is part of the valuable contents available at www.ftpall.com, a free online glossary with more than five thousand financial and business terms. This document can be copied and distributed freely Find thousands of financial terms at www.ftpall.com respecting its original format. It is forbidden its transcription, translation or change on its format without authorization of its author or editor. FUNDS 12b 1 funds • Mutual funds that do not charge an upfront or back-end commission, but instead take out up to 1.25% of average daily fund assets each year to cover the costs of selling and marketing shares, an arrangement allowed by the SEC's Rule 12b-I (passed in 1980). Beta equation mutual funds • The beta of a fund is determined as follows: [(n) (sum of (xy)) ]-[ (sum of x) (sum of y)] [(n) (sum of (xx)) ]-[ (sum of x) (sum of x)] where: n = # of observations (36 months) x = rate of return for the S&P 500 Index y = rate of return for the fund. Beta mutual funds • The measure of a fund's or stocks risk in relation to the market. A beta of 0.7 means the fund's total return is likely to move up or down 70% of the market change; 1.3 means total return is likely to move up or down 30% more than the market. Beta www.ftpall.com 2|Page is referred to as an index of the systematic risk due to general market conditions that cannot be diversified away. Bond arbitrage hedge funds • Try to capture interest rate differentials or spreads due to mispricing or better financing than general market participants can attain. Sometimes, there can be a yield pickup due to convergence between two instruments, a pricing discrepancy due to inefficient evaluations of senior and junior credit risks, or relative value differences. Find thousands of financial terms at www.ftpall.com Commodity funds • Are investment vehicles that invest in futures and options on futures. Commodities can include the tradition grains, metals, and livestock as well as stock indices, currencies, and other financials. Convertible securities hedge funds • Generally look to purchase the bonds or preferred securities and sell common shares against these long positions. The intent is to hedge interest or dividend paying securities with low or no dividend common shares. In the event of a default the bonds and other securities have priority to the common shares. Also, the bonds or preferred stocks usually generate positive cash flows whereas the short positions are generally not responsible for dividend payments. Therefore the fund should have a positive cash flow and protected by relative seniority position in corporate securities. These funds also use warrants and options as portfolio instruments. Cost of funds • Interest rate associated with borrowing money. Cost of funds index • Is a benchmark used for resetting the coupon rate on an adjustable rate mortgage. Frequently, this is based on the cost of the 11th District Federal Home Loan www.ftpall.com 3|Page Bankfunds. This district includes Arizona, California and Nevada. Currencies and major foreign market hedge funds • Invest in securities and derivatives which go across borders. These funds try to capitalize on interest rate differentials between currencies, varying investment climates for different countries, relative volatilities in equity or credit markets, and variations of the other hedge fund themes. Dividend yield funds Find thousands of financial terms at www.ftpall.com • Indicated yield represents return on a share of a mutual fund held over the past 12months. Assumes fund was purchased 1 year ago. Reflects effect of sales charges (at current rates), but not redemption charges. Emerging markets funds • Are investment vehicles, either open-end or closed-end, which invest in countries whose economies are becoming more capitalistic. Often this emergence is from socialistic, communistic or other tightly controlled economic systems. There are also Hedge Funds which participate in emerging markets. Emerging markets hedge funds • Narrow their investment horizon to issues in markets which are not as mature or liquid as the previous group. However, these less developed markets are believed to offer greater risk adjusted rates of return. A general perspective is akin to getting in on the ground floor. Endowment funds • Investment funds established for the support of institutions such as colleges, private schools, museums, hospitals, and foundations. The investment income may be used for the operation of the institution and for capital expenditures. Equity hedge funds www.ftpall.com 4|Page • Try to long position themselves in stronger or outperform issues while selling short weaker or poorer prospect securities. Variations of this are: trading large cap issues versus small caps; using derivatives for enhanced returns; specializing in program trading; or using leverage to magnify returns. External funds required plug figure • Under the judgmental approach for developing a pro forma balance sheet, the amount of external financing needed to bring the statement into balance. Fed funds Find thousands of financial terms at www.ftpall.com • See federal funds. Federal funds • Non-interest bearing deposits held in reserve for depository institutions at their district Federal Reserve Bank. Also, excess reserves lent by banks to each other. • Loan transactions between commercial banks in which the Federal Reserve banks become involved. • (1) Non-interest-bearing deposits held by member banks at the Federal Reserve. (2) Used to denote "immediately available" funds in the clearing sense. Federal funds market • The market where banks can borrow or lend reserves, allowing banks temporarily short of their required reserves to borrow reserves from banks that have excess reserves. Federal funds purchased funds • This term refers to interbank borrowings or the amounts the banks borrow from each other. These liabilities are not subject to reserve requirements or deposit insurance. They are short- term uncollateralized loans. More than 90% has a maturity of 1 day. Costs reflect supply and demand. Subject to large volatility on the www.ftpall.com 5|Page second Tuesday or Wednesday of the reserve maintenance period. Federal funds rate • This is the interest rate that banks with excess reserves at a Federal Reserve district bank charge other banks that need overnight loans. The Fed Funds rate, as it is called, often points to the direction of U.S. interest rates. • The rate of interest charged by banks for short-term OVERNIGHT to other banks. The Federal Reserve Bank through open-market operations establishes this rate. Find thousands of financial terms at www.ftpall.com • The rate of interest at which Fed funds are traded. This rate is currently pegged by the Federal Reserve through open market operations. • The interest rate charged by one institution lending federal funds to another. Forward fed funds • Fed funds traded for future delivery. • Fed funds traded for future delivery. Funds from operations • Abbreviated FFO. Used by Real Estate Investment Trusts (REITS) to define the cash flow from their operations. It is calculated by adding Depreciation and Amortization expenses to earnings, and can be represented as Funds From Operations Per Share (FFO/S). FFO/S should be used in lieu of EPS when evaluating REITs and other similar investment trusts. • Abbreviated FFO. Used by real estate and other investment trusts to define the cash flow from trust operations. It is earnings with depreciation and amortization added back. A similar term increasingly used is Funds Available for Distribution (FAD), which is FFO less capital investments in trust property and the amortization of mortgages. Good funds www.ftpall.com 6|Page • A market expression for immediately available money, that is, Fed funds. Macro hedge funds • Are those which are more benchmark or index oriented. They tend to be top-down in approach rather than bottom-up. These Macro Hedge Funds employ strategies using actual securities, commodities, currencies, futures, and derivatives. They also use various degrees of leverage to try to outperform the market or benchmark indices. Money market mutual funds Find thousands of financial terms at www.ftpall.com • Professionally managed portfolios of various popular marketable securities, having instant liquidity, competitive yields, and low transaction costs. Mortgage backed securities hedge funds • Generally focus on being long the actual mortgage backed securities and short some proxy such as TBAs (To Be Announced), futures, Treasuries or derivatives. These funds typically purchase highly rated agency paper, CMOs, or REMICs and finance the positions in the repo market. This financing can often result in gross asset, principal or market values of $10 billion for an initial cash/equity position of $1 billion dollars. In some respects it is comparable to buying a house with borrowed money. It is the borrowing which magnifies the performance. If the market quickly jumps 10 percent higher, then the buyer doubled his investment. Here, it would be 10 percent of $10 billion or a $1billion profit against an initial capitalization of $1 billion. However, if the market declines by 10 percent, then the original investor is out. If the market went down 25 percent, then the original investor is gone but the lending institution (bank or brokerage firm) is on the-hook for $1.5 billion. Effectively, this is what has been recently occurring in the financial industry. The lenders are becoming defacto new investors, holding losing positions, because of defaults. Mutual funds www.ftpall.com 7|Page • Investment companies that receive cash from individuals for investment in both money and capital market securities. Objective mutual funds • The fund's investment strategy category as stated in the prospectus. There are more than 20 standardized categories. Pension funds • Investment entities established by employers to provide a pension (retirement Find thousands of financial terms at www.ftpall.com income) to employees during their retirement. Stocks and bonds hedge funds • Are combinations which are analogous to Balanced Mutual Funds but, depending on the underlying charter, can use higher degrees of leverage or derivatives. Surplus funds • Cash flow available after payment of taxes in the project. Target funds • Are mutual funds which invest in specified categories, such as, average maturities or durations. Term fed funds • Fed funds sold for a period of time longer than overnight. • Fed Funds sold for a period of time longer than overnight. Unlimited funds • The financial situation in which a firm is able to accept all independent projects that provides an acceptable return. Value funds • Are mutual or hedge funds which invest in apparently undervalued companies. www.ftpall.com 8|Page These companies on a quantitative basis may exhibit lower-than-average ratios, such as price/earnings, price/sales, or book value. Nevertheless, these stocks are viewed by participants as being bargain priced or value attractive. Vulture funds • Are investment vehicles which focus on acquiring properties which may be available due to financial distress. The properties themselves may not be damaged but the principal owners may be in immediate need of cash. Usually, the term describes investment activities in real estate or closely held companies which may Find thousands of financial terms at www.ftpall.com not enjoy the liquidity benefits of an exchange listing.