FINC write-up : Solution Essays

This week we discuss different types of investment funds, including mutual funds and hedge funds.  Mutual funds are the second largest type of financial intermediary in the U.S. beyond only depository institutions. Although mutual funds have been around since the 1920s, as recently as 1970 there were only 361 funds with $50 billion in total industry assets. In 2016 there were 8,105 mutual funds with total net assets of $16,350.1 billion. There has been a huge increase in the number of accounts since 1990, although all numbers fell during the crisis. Part of the growth in mutual funds has been driven by the growth in retirement funds under management by the mutual fund industry. Retirement funds grew from $4.0 trillion in assets in 1990 to $24.5 trillion in 2016. Mutual funds manage about 25% of this total. Much of the growth in this market has come from so called institutional funds, which are funds that manage retirement plans for a company’s employees. New innovations in retirement focused funds include target date (aka lifecycle) funds and lifestyle (aka target risk) funds. The former employs asset allocation among a group of funds that reduce risk as the target retirement date nears. The latter employs a constant level of risk.