CFA Level 1 Alternative Investments - Investment Companies

a. differentiate between an open-end and a closed-end fund, and explain how net
asset value of a fund is calculated and the nature of fees charged by investment
companies;

Investment companies are financial intermediaries that pool and invest funds of varius individual and institutional investors, giving the investors rights to a proportional share of the pooled fund performance.

There are managed investment companies and unmanaged investment companies in United States.Unit investment trusts in United States are unmanaged investment companies and they hold a fixed portfolio of investments for the life of the company and they stan ready to redeem the investor's units at market value (net asset value) and also for reselling such shares to new investors.


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Unit Investment Trusts (UITs)

A "unit investment trust," commonly referred to as a "UIT," is one of three basic types of investment company. The other two types are mutual funds and closed-end funds.

Here are some of the traditional and distinguishing characteristics of UITs:

A UIT typically issues redeemable securities (or "units"), like a mutual fund, which means that the UIT will buy back an investor's "units," at the investor's request, at their approximate net asset value (or NAV) . Some exchange-traded funds (ETFs) are structured as UITs. Under SEC exemptive orders, shares of ETFs are only redeemable in very large blocks (blocks of 50,000 shares, for example) and are traded on a secondary market.

A UIT typically will make a one-time "public offering" of only a specific, fixed number of units (like closed-end funds). Many UIT sponsors, however, will maintain a secondary market, which allows owners of UIT units to sell them back to the sponsors and allows other investors to buy UIT units from the sponsors.

A UIT will have a termination date (a date when the UIT will terminate and dissolve) that is established when the UIT is created (although some may terminate more than fifty years after they are created). In the case of a UIT investing in bonds, for example, the termination date may be determined by the maturity date of the bond investments. When a UIT terminates, any remaining investment portfolio securities are sold and the proceeds are paid to the investors.

A UIT does not actively trade its investment portfolio. That is, a UIT buys a relatively fixed portfolio of securities (for example, five, ten, or twenty specific stocks or bonds), and holds them with little or no change for the life of the UIT. Because the investment portfolio of a UIT generally is fixed, investors know more or less what they are investing in for the duration of their investment. Investors will find the portfolio securities held by the UIT listed in its prospectus.

A UIT does not have a board of directors, corporate officers, or an investment adviser to render advice during the life of the trust.

Before investing in a UIT, you should carefully read all of the UIT's available information, including its prospectus.

UITs are regulated primarily under the Investment Company Act of 1940 and the rules adopted under that Act, in particular Section 4 and Section 26.

Source:
http://www.sec.gov/answers/uit.htm
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Managed investment companies are categorised into open-end and closed-end companies

Open-end investment companies are called mutual funds and they stand ready to sell new shares or to redeem existing shares at NAV. Their assets under management expand or contract with each transaction that investors make.

Closed-end investment companies issue shares only once to the public and then those shares are traded in the secondary markets.

NAV calculation of investment companies

NAV is the per-share value of the investment company's assets minus liabilities.

Assets are all the cash and securities that are on its books, accrued dividends &interest payments due to from companies and payments due from stock brokers. Liabilities include payments due to brokers and other parties from whom securities are purchased and will include management fees due to investment managers.

Fees charged by Managers and Management Companies

Investment companies charge fees and also expenses are incurred in transactions and accounting/administration of the fund.

Annual charges comprise management fees, distribution fees and operating expenses.

One time charges at purchase and exit provide commission for sales agent. They do not provide any fee for fund management.