Banking
Investment banks
assist public and private corporations in raising funds in the capital
markets (both equity and debt), as well as in providing strategic
advisory services for mergers, acquisitions and other types of
financial transactions. They also act as intermediaries in trading for
clients. Investment banks differ from commercial banks, which take
deposits and make commercial and retail loans. Investment banks may
also differ from brokerages, which in general assist in the purchase
and sale of stocks, bonds, and mutual funds. However some firms operate
as both brokerages and investment banks. You can see their recruitment
criteria in your pack. All underlined terms are available in the glossary at the end of this document.
In the financial services
industry, the term asset management is often used to describe the
mutual fund segment or division of a financial services
company. Often times this segment includes revenues from separate
accounts, which can be thought of as "a mutual fund for one person"
where the investment manager controls almost all the decisions. In
banks, this segment has traditionally included the revenues and profits
from money market funds sold to large corporations, or even a
specialized money market fund set up for an individual corporation
(this is called liquidity management). Typically, large corporations
only keep in their bank accounts as much cash as required by the bank
to offset the fees charged by that bank. Excess cash is then usually
invested in a money market mutual fund or a short term series of bonds.
The fees earned by a bank for this management is often described under
the "Asset management" category.
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.
