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Investment Banking
There
appears to be considerable confusion today about what does and does not
constitute an "investment bank" and an "investment banker". In the
strictest definition, investment banking is the raising of funds, both
in debt and equity, and the name of the division handling this in an
investment bank is often called the "Investment Banking Division"
(IBD). Almost all investment banks are heavily involved in providing
additional financial services for clients such as the trading of fixed
income, foreign exchange, commodity and equity securities. It is
therefore acceptable to refer to both the "Investment Banking Division"
and other 'front office' divisions such as "Fixed Income" as part of
"investment banking", and any employee involved in either side an
"investment banker".
Investment Management
Investment
management: Also called portfolio management and money management, it
is a branch of investment analysis that looks into the process of
managing money. Investment portfolios could be managed through
decisions about security purchases and sales.
Hedge Funds
Vary
greatly, but have some or all of the following characteristics. They
will be based offshore and are virtually unregulated. They will have
small groups of investors, usually rich individuals or institutions.
They will aim for an absolute (positive) rather than a relative return;
their managers will be incentivised by a performance fee. Hedge fund
managers get a percentage of the assets and take 20% of the gains, both
realized and unrealized. They will have the ability to go short, and
they will have the ability to use leverage. These are funds usually
used by wealthy private investor or institutions. Hedge funds are
restricted by law to no more than 100 investors; the minimum
contribution is typically $1m. The first hedge fund started in New York
on 1 January 1949. Hedge fund managers sell stock short and trade in
options of the shares they hold. Hedge Funds are extremely flexible in
their investment options because they use financial instruments
generally beyond the reach of mutual funds, which have SEC regulations
and disclosure requirements that largely prevent them from using
short-selling, leverage, concentrated investments and derivatives. This
flexibility, which includes use of hedging strategies to protect
downside risk, gives hedge funds the ability to best manage investment
risks. In 2002 the IMF estimated the number of hedge funds at
2,500-3,000, managing $200-$300 billion in capital and total assets of
US$1000 billion.
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