Types of Funds
Open-Ended Funds
Unit trusts and open-ended investment companies (OEICs) are the most common type of open-ended funds. Open-ended means that the number of units, or shares respectively, in these funds increases and decreases depending on the level of new investments and redemptions. When you buy into an open-ended fund, new units are created. Conversely, if you sell, those units are cancelled. The value of these shares or units directly reflects the value of the underlying portfolio.
Closed-Ended Funds
Investment trusts are an example of closed-ended funds. They typically issue shares which are then traded on a stock exchange. The number of shares is fixed. This means the value of the shares reflects both the “net asset value” of the fund’s underlying portfolio and the supply/demand for the fund’s shares. As a result, a closed-ended fund’s shares can trade either at a discount or premium to its underlying net asset value.
Exchange Traded Funds (ETFs)
ETFs are funds designed to track indices. They are a hybrid between open-ended and closed-ended funds. They are open-ended as their number of shares is not fixed, but have characteristics of closed-ended funds, such as listing on an exchange and intraday dealing. They normally fully replicate the index they track, by holding all the constituents in their respective index weightings.
Emerging Markets Funds
These funds aim to give investors exposure to stock markets in emerging markets economies either on a global basis or in specific regions, Eastern Europe for example. Emerging economies are considered those that have a low-to-mid per capita income, have ongoing economic development and reform programs, and are considered to be fast growing economies.
BRIC Funds
In fund management speak 'BRIC' stands for Brazil, Russia, India and China. 'BRIC' funds generally have the remit of providing exposure to only these four emerging economies.
'Frontier' Funds
Frontier funds allow investors to gain exposure to those economies classified as 'frontier markets'. Frontier markets are generally defined as those markets that tend to have a smaller capitalisation, fewer traded securities and are less liquid than emerging markets. Countries within this frame can be at different levels of economic development, with gross domestic product per capita ranging from low, in countries such as Vietnam and Nigeria, to high, in the Gulf countries for example.
Hedge Funds
There is no legally or academically accepted definition of the term “hedge fund”. However, investment funds that use or have become associated with the term 'hedge fund' tend to have a number of common characteristics:
- Absolute return focus
- Use of leverage
- Performance fees
- Wide investment remit
- Managers' own capital invested
- Little or no regulation
The principal attraction of hedge funds is that they tend to produce positive absolute returns over long periods of time with less volatility than equities. However, a number of reasons have prevented hedge funds from being more widely represented in the portfolios of UK based private investors. Among these:
- High minimum investment levels
- Illiquidity
- Tax inefficiency
- Currency risk
- Fees
London Listed Hedge Funds – a solution for the private investor
The closed-ended investment company structure has addressed the bulk of the aforementioned obstacles. There are now over 30 London listed vehicles which could reasonably be described as hedge funds. These can be bought and sold during the trading day in the same way as a conventional equity.
Specialist Funds
Funds can provide a way of outsourcing to a specialist investment manager. Specialist funds are funds that invest in a particular area or sector. For example, instead of buying a number of holdings in UK banks, an investor can buy a specialist financials fund managed by someone who is better placed to select the best mix of bank and financial stocks from a global perspective.
Ethical Funds
Ethical, or socially responsible, funds typically either look for companies that are actively pursuing ways of improving health and the environment, or avoid companies that they consider have a negative effect on society.
Exposure to Gold via Funds
An investor can gain exposure to gold via ETFs designed to track the gold price, or via specialised funds investing in companies with gold exposure, such as mining companies.
Exposure to Oil via Funds
An investor can gain exposure to oil via ETFs designed to track the oil price, or via specialised funds investing in companies exposed to oil, such as exploration, development, production and servicing companies.
'Soft' Commodities
'Soft' commodities is another term for agricultural commodities, such as wheat, cotton, palm oil and orange juice. An investor can gain exposure to soft commodities via ‘agricultural’ funds. These can either invest in future contracts on soft commodities, or in companies that are involved in, related to, concerned with, or affected by agriculture and farming related issues. Investors can also gain exposure to individual soft commodities by buying ETFs designed to track the price of single commodities.