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Hedge Fund Investing A Practical Approach to Understanding Investor
Motivation, Manager Profits, and Fund Performance Second Edition
ISBN 978-1-119-21037-5 (ePub) Printed in the United States of America.
This book is dedicated to my wife, Maureen, and my children, Sarah, Andrew, and Will.
About the Author
Overview Chapter 1 The Basics of Hedge Fund Investing
Chapter 2 Hedge Fund Strategies, Performance Measurement, and Risk
Chapter 3 Who Invests in Hedge Funds and Why?
Chapter 4 Industry Trends, Flows, and Characteristics
Understanding the Strategies Chapter 5 Global Macro Investing
Chapter 6 Equity-Oriented Styles
Chapter 7 Fixed-Income–Oriented Strategies
Chapter 8 Multistrategy Funds, Funds of Hedge Funds, and Replication Products
Chapter 9 Portfolio Financing and Secondary Market Trading
Evaluating Individual Fund Risk and Reward Chapter 10 Measuring Performance and Performance Persistence
Chapter 11 Impact of Fund Characteristics and Terms on Performance
Chapter 12 Performing Due Diligence on Specific Managers and Funds
Chapter 13 Evaluating the Roles of Service Providers
Chapter 14 Observations and Outlook
References and Additional Reading
his book is designed to provide an overview of alternative investments and, in particular, instill in readers a working knowledge of that portion of alternative investments known as hedge fund investing. The second edition of this book includes important updates related to industry flows and performance, plus new material covering the exciting new world of hedged mutual funds, secondary trading in hedge fund investments, and more information about the various techniques and instruments used by hedge fund managers to finance their portfolios. The original motivation to write this book was to deliver a holistic view of hedge fund investing. That has not changed. The intention was to provide a cradle‐to‐grave perspective for first‐time investors, for practitioners dealing with hedge funds as clients or counterparties, and for students wishing to learn how the sector operates from both a theoretical and a practical perspective. My personal experiences as a banker, accountant, service provider, investor, and partner in a hedge fund and a fund of hedge funds allows me to deliver some practical insights that I believe will facilitate learning. The goal for this second edition is to once again present a comprehensive view of the reasons people invest in the sector, discuss how the managers, funds, and strategies interact, and recommend criteria people can use to select managers and funds—all without getting lost in too much detail. The approach is to cover a wide range of material in sufficient detail to familiarize readers with the issues, without getting lost in the multitude of regulations and mathematics needed to fully investigate any single topic. The hope is that by “keeping it simple” readers will learn enough about the asset class and the process of investing to give them confidence to move forward with asking the questions needed to become a great investor. Importantly, one of the goals for this book, if not its primary goal, is to make the asset class accessible and to demystify what is at times presented as an overly complex and esoteric category of investing. My approach is to deliver a balanced discussion of the broad spectrum of information needed to invest in hedge funds; however, it is inevitable that certain sections garner more emphasis than others. The vast majority of information in this text comes from my personal experience in providing services to, trading with, lending to, or investing in hedge funds over the past 25 years. It also includes the advice and input
of former colleagues and friends in the industry who share my interest in promoting educational efforts about hedge fund investing. It is only through education that the myths of hedge fund investing can be debunked and the opportunities can be assessed objectively. In this way, more people can reap the rewards and benefits of hedge fund investing while also fully understanding the risks of this exciting asset class. The book is designed for those who have a basic knowledge of financial instruments, markets, asset allocation, and portfolio management. A rudimentary knowledge of statistics and some of the basic principles of calculus is also helpful, although not a requirement. The book is organized into three parts related to basic concepts and market characteristics, an explanation of the individual strategies and financing tools used by hedge fund managers, and an overview of the process needed for the evaluation and analysis of individual managers and funds, including approaches to performing a due diligence process on any one fund. Each chapter has its own individual objectives and illustrations that can be read on their own or as part of the complete text. Part One of the book provides readers with an overview of alternative investments. It highlights the similarities and differences among various types of alternatives, including hedge funds. It establishes the framework for understanding fund‐level profit or loss calculations, performance measurement, and risk. It also provides readers with an understanding of the rationale for investing in hedge funds as well as the flows experienced by the sector over time. Part Two is designed to explore several of the most prominent hedge fund investing strategies in more detail. It provides straightforward explanations of the important terms, definitions, trades, organization structures, portfolio constructions, performance measurements, and risk assessments used in each strategy. Strategies are organized into those that are not directly correlated to the traditional stock and bond market, those that are equity or fixed‐income oriented, and those that are multistrategy in nature. It also includes new sections on the financing market and the secondary market for trading in hedge fund investments. Part Three explores the nature of absolute, relative, and risk‐adjusted performance measures; the impact of fund characteristics related to compensation arrangements; fund terms; and environmental conditions that motivate behavior and influence performance. This section also covers the due diligence process for selecting a single hedge fund for investment from a universe of peers. Topics covered include how to quickly assess and evaluate the people, pedigree, and processes that establish the DNA of any fund; understanding the investment and risk management process of a fund; the impact of the fund’s business model and counterparty risk on the fund’s
performance and sustainability; and the role of a fund’s service providers in creating opportunities for a fund, influencing a fund’s performance, or protecting investors from fraud, blowups, or other calamities. The book ends with some final observations, a review of the challenges faced by the industry today, and the outlook or trends that are likely to continue going forward. This book can be used by commercial practitioners on a stand‐alone basis or by educators in conjunction with supplemental material available online that includes PowerPoint slides, Excel spreadsheets, end‐of‐chapter discussion questions, and a test bank of over 100 questions. Educators can download the test bank and other learning tools at Wiley’s Instructor Site.
his book is possible only as a result of the support of my family, Maureen, Sarah, Andrew, and Will, and all the terrific people I have had the chance to work with during my career, both in industry and in academia. I am also grateful to the alternative investor community at Fordham University and its many alumni, as well as all my friends and former colleagues who have lectured in my classroom or otherwise provided insights and information that contributed to this book and to my knowledge of the hedge fund industry over the years.
About the Author
Kevin R. Mirabile is currently a clinical assistant professor of finance at Fordham University where he teaches courses on the principles of finance, alternative investing, derivatives, and hedge funds. Mr. Mirabile has over 30 years of business development, regulatory, financing, accounting, trading, sales, and asset management experience in the United States and abroad. He is a former COO of Larch Lane Advisors, managing director and executive committee member at Barclays Capital, senior VP and operating committee member of Daiwa Securities, a principal at Morgan Stanley, and president of the Morgan Stanley Trust Company. His areas of expertise are in banking, asset management, and hedge fund investing. Mr. Mirabile is an active industry consultant on the topics of hedge fund investing and operational and business model risk assessment. He has given lectures across the United States and abroad on the topics of alternative investing, hedge funds, and trends in asset management. Mr. Mirabile is a CPA, a member of the AICPA, a member of the Greenwich Roundtable’s Founders Council, and a contributor to its “Best Practices” series on alternative investing. He is also a member of the Hedge Fund Association’s Education Committee. Mr. Mirabile received his BS in accounting from SUNY Albany in 1983, earned his MS in banking and finance from Boston University in 2008, and completed his doctoral studies with a DPS degree in finance and economics from Pace University in May 2013.
newcomer to hedge fund investing can easily get overwhelmed by the complex terminology and unique characteristics associated with this type of investing. There is a lot to know and not always a lot of time to learn it. This chapter is meant to present the basics of hedge fund investing, including defining alternative investments, discussing the characteristics and structures of hedge funds on a standalone basis and relative to mutual funds, and evaluating the impact of hedge fund trading on the broader markets. This chapter lays the foundation for the rest of the book. Let’s get started.
What Are Alternative Investments? Alternative investments is a term used to describe investments in nontraditional asset classes. Traditional asset classes include stocks, bonds, and sometimes commodities, and foreign exchange. Alternative investments include hard assets, collectables, real estate funds, private equity, venture capital, managed futures funds, hedge funds, and sometimes even structured products like CLOs and CDOs. Every institution seems to have its own set of rules for what is and is not an alternative investment. Investors obtain alternative exposure by investing in vehicles such as private limited partnerships and alternative mutual funds. Alternatives may offer attractive portfolio benefits to investors, although on a stand-alone basis they can be more volatile or less liquid than traditional investments. The more established and better understood traditional asset classes can be described as having large global markets, significant pools of liquidity, a high degree of price transparency, and regulation, along with well-established market microstructures. Stocks and bonds have been available to investors for centuries. Even mutual funds have been around in various shapes and
sizes for well over 100 years. Alternatives and hedge funds, on the other hand, by even the broadest measures, only started in the late 1960s and really only began to grow in the early 1990s. Alternative investing is not a mature industry. Alternative investments are considered relatively young in terms of life cycle and track records. Hedge funds are perhaps the newest form of alternatives and as such may also be the least understood. Their business models are also not as stable, well developed, or mature as those associated with traditional investing or even earlier forms of alternatives, such as real estate and private equity. The market value of publicly traded equity and debt is well over $250 trillion today. There are more than $15 trillion of investments in traditional stock and bond mutual funds in the United States and over $30 trillion globally. This compares to about $3 trillion invested globally in hedge funds at the end of Q1 2015. So what exactly constitutes an alternative as opposed to a traditional investment? There are a few broad categories that most professionals would agree make up the universe of alternative investment opportunities. Real estate investing includes direct investments or funds that invest in commercial or residential real estate or mortgages that produce rental income, interest income, and capital appreciation. Most funds are organized in specific regions or by specific types of properties. Private equity investing includes direct investments or funds that take equity ownership in existing private companies in the hope of streamlining or improving management, negotiating favorable leverage terms with banks, and improving performance so that the fund may ultimately profit from an initial public offering (IPO) of the company’s shares. Venture capital investing includes direct investments or funds that provide day-one capital to fund new business ideas. These early-stage investors hope to profit by sale of the company to a strategic investor or perhaps to a private equity fund that ultimately will help the company go public. Managed futures investing includes funds that are specially dedicated to trading futures contracts based on directional or trend-following models. These funds are similar to hedge funds in many ways. They are different from hedge funds in that they are restricted to trading listed futures contracts and are regulated by the Commodity Futures Trading Commission (CFTC). Hedge fund investing includes investments in either private investment partnerships, mutual funds or UCITS that trade stocks, bonds,
The Basics of Hedge Fund Investing
commodities, or derivatives using leverage, short selling, and other techniques designed to enhance performance and reduce the volatility of traditional asset classes and investments. In addition to the more established categories of alternative investments mentioned here, there continue to be newer emergent or exotic alternative strategies that come to the market every year. These exotic alternative investments include direct investments or funds that invest in life insurance settlements, farmland, weather derivatives, or collectables such as artwork, comic books, vintage automobiles, and rare coins (even Bitcoins). Most of these exotic and collectable investments still lack a minimum level of liquidity or price transparency, and are subject to greater fraud risk or are very difficult to value. These investments tend to remain in the domain of pure speculators, hobbyists, and those who are equal parts product enthusiasts and investors. Most of the established and exotic alternative investments share at least a few common attributes or qualities. Most, if not all, alternative investment managers are experts in their area of investment, are major investors in the fund they manage, and get paid both a management and an incentive fee. Many also use leverage to enhance returns; some create portfolios that are illiquid at times; most only provide limited transparency to investors; and some alternative investments can be difficult to value. When thinking about an alternative investment, here are seven things to consider: 1.Expert management. Does the manager of the investments have significant experience in a specific market segment, industry, or area of investment? This extra level of skill and focus can allow the manager to identify unique values or opportunities not readily seen by the investor community at large. 2.Manager co-investment. Do the manager and many of the partners or employees of the management company have a significant investment in the fund? This serves to align the interests of the investors with those of the manager. 3.Performance fees. Does the manager get paid a percentage of the profits of the investments, in addition to any flat fees for managing the fund? The widespread use of an incentive fee is based on the principle that it further aligns the interest of the manager with that of the investor. 4.Leverage. How much money or securities does the fund borrow to make investments? The use of a fund’s investor capital, plus leverage obtained from banks or derivatives, allows the fund to magnify gains or losses from each investment and achieve higher rates of return.
5.Illiquidity. How long do investors need to lock up money in the fund before they can sell or redeem? Many times funds require investors to lock up their money for an extended period of time before they can redeem their investment. 6.Limited transparency. Does the fund disclose its investments to its investors on a daily basis? Many times a manager may restrict the amount of periodic information provided to investors related to positions, strategy, leverage, or risk. 7.Hard to value. Can the investment or the underlying instruments owned in the portfolio be valued on an exchange or do they require an over-the-counter (OTC) quotation or price, a model price, or an independent valuation to determine the value? An illiquid market, third-party valuations, or the use of model price for an instrument can lead to more subjective portfolio pricing and less accurate fund valuations. Alternative investment managers are usually trying to generate an absolute return and not managing money to beat a benchmark. This gives them the freedom to focus on narrow opportunities, with significant barriers to entry, requiring a high level of expertise. A commercial real estate fund might employ a property manager who is an expert on shopping malls in Chicago. A private equity fund may focus on infrastructure projects or telecommunications and may employ former industry executives and engineers to evaluate potential investments. A hedge fund that invests in equities related to the biotech industry may have doctors on staff who work as consultants or research analysts who recommend companies to the portfolio manager. Most professional managers who start a private equity or hedge fund also invest the majority of their personal net worth in the fund. Managers do this to align interests and to signal confidence to investors that they believe in what they are doing and that they are not merely managing other people’s money. Managers of alternative investments usually command a performance fee in addition to a fixed fee for managing assets. Managers getting an incentive or performance fee share in the upside when they produce positive results and generally do not get paid when they produce negative results. The effect of the performance fee is to give the manager a tangible incentive to generate the highest possible absolute level of return and to minimize variation and volatility over a complete business cycle. Alternative investments are generally less regulated than traditional investments. This opens the door to the use of leverage, short selling, and
The Basics of Hedge Fund Investing
derivatives on a much grander scale. Leverage is a powerful tool for magnifying winning outcomes and enhancing returns. Short selling is another form of leverage that particularly applies to managed futures and hedge funds and allows managers to make money when prices fall and magnify outcomes. It also enables them to mitigate volatility and reduce risk. Derivatives can be used by real estate funds to hedge interest rate risk or by hedge funds to place bets on the market. Managers of alternatives can be quite secretive and at times even a bit paranoid about disclosure. They routinely do not provide much information to their investors and, rather, expect investors to rely on incentives and co-investment to align interests rather than active monitoring of positions. Some institutions struggle with the limited transparency that many alternative investments offer. Managers are also terribly afraid of their strategies being leaked and replicated if they provide too many details.
Hedge Fund Characteristics and Structures Hedge funds use a wide range of legal entities and domiciles to gather assets from investors. Each entity is designed for a specific purpose and a specific type of investor. Domestic funds in the United States tend to be organized as limited partnerships or limited liability companies, and investors tend to be individuals. Offshore funds are generally organized in tax or regulatory advantaged locations such as Cayman Islands, Bermuda, Luxembourg, or Ireland. These funds cater to certain types of U.S. not-for-profit investors and international investors. Other structures, such as mutual funds, are designed for retail investors or institutions who want more regulation and surveillance of the structures offered. Regardless of the structure used, each fund must also appoint a manager to make decisions and run the day-to-day operations, either as the general partner or under a contract established by the fund board between the fund and the manager.
Strutures and Domiciles A hedge fund is a specific type of alternative investment. It is a legal entity, not an asset class per se. Generally, hedge funds are commingled vehicles that allow many investors who qualify to be aggregated and invested as a single pool of capital. A hedge fund is generally lightly regulated and combines leverage, short selling, and derivatives with active security selection, macro views, and advance portfolio construction methods to generate returns and manage risk.
Traditionally, hedge funds were limited in the structures they used to gather assets. They were generally organized as either onshore funds or offshore funds. Onshore funds are funds organized in the United States as either partnerships or limited liability companies. Offshore funds are investment companies organized outside the United States, typically in a tax haven such as the Cayman Islands or Luxembourg. Today, hedge fund strategies are also available to retail investors and are offered as mutual funds or UCITS (Undertakings for Collective Investing in Tradable Securities) products. Onshore funds are U.S. entities that are formed as limited partnerships (LP) or limited liability companies (LLC). Onshore funds are typically formed in Delaware and managed by a general partner (GP). The managing member or manager typically manages an LLC. Investors in an LP are limited partners, and investors in an LLC are simply members. The GP or managing members are responsible for portfolio trading and take actions on behalf of the fund. Offshore funds are most typically offered to qualified U.S. taxable investors or investors located outside the United States. The vehicle used is normally a listed portfolio company. Funds are typically formed in jurisdictions that do not impose tax on fund income (e.g., Cayman Islands, Bermuda, British Virgin Islands). A board of directors is required to govern the company and appoint a professional investment manager to manage the portfolio. The manager is responsible for portfolio trading and takes actions on behalf of the fund. Mutual funds are a type of U.S. investment company created under the Investment Company Act of 1940. Mutual funds are collective investment vehicles investing in a wide array of products and instruments. An investment manager, who is generally also registered with the Securities and Exchange Commission (SEC), is appointed to manage the portfolio on behalf of the fund. Mutual funds also have a board of directors to govern the fund and appoint service providers. Mutual funds are subject to a higher level of regulatory oversight than onshore or offshore funds, and, in most cases, diversification, leverage, short selling, and liquidity restrictions are imposed on the fund. UCITS funds are similar to mutual funds. They are highly regulated collective investments that can be offered to either institutional or retail investors in Europe and elsewhere.
Management Company Responsibility and Organizational Design A hedge fund manager is the company, individual, or partnership that is empowered by the fund to manage its investments and bind the fund to legal obligations. Figure 1.1 shows the position of the hedge fund man-
The Basics of Hedge Fund Investing
Fund A Onshore L.P.
Management Company or Gernal Partner
Brokers Prime Brokers Banks Exchanges
Mutual Funds or UCITS
Fund B Offshore Company
Figure 1.1 Position of the Hedge Fund Management Company
ager or general partner at the center of all decision making, transactions, and business relationships. Under certain circumstances, particularly with offshore funds and mutual funds, a board of directors or group of advisors also has the authority to commit the fund to contracts or make decisions on behalf of the fund. In most cases, these decisions, if retained by a board, are in practice delegated to the manager and reviewed by the board or advisors. The fund manager is the entity that has staff, occupies space, pays bills, buys and sells stocks, and manages risk. The fund owns the securities purchased and any liabilities in the form of loans, borrowed shares, derivative obligations, or payables created on its behalf as a result of manager actions or omissions. Funds can be formed in a number of U.S. and offshore jurisdictions. Common U.S. jurisdictions include Delaware and New York. Common offshore jurisdictions include the Cayman Islands, Ireland, the British Virgin Islands, and Luxembourg. The primary purposes of the offshore fund are to solicit international investors, create eligibility for certain investments whose sale is prohibited or restricted in the United States, and facilitate the needs of U.S. tax-exempt investors. Most funds create both a domestic onshore fund and an offshore fund when they launch to broaden their appeal and accessibility to the widest range of investors possible. Retail mutual funds or UCITS funds normally do not get established until after
the manager has been in operation for a year or more and has established a track record. The management company organizes the initial setup of the business and runs each fund investment vehicle under its domain on a day-to-day basis. The management company usually includes many people and teams responsible for executing trades, designing the portfolio, performing research, and managing risk, in addition to those needed to run operations and accounting, market the firm, and offer the funds to investors. Hedge fund management companies share a number of common organization design features; however, the specific organization of any management company is highly variable and dependent on its size, age, strategy, jurisdiction, and product mix and the personality of the founding partner. A fund manager who launches with $50 to $100 million in a single fund would require at least three to five people to manage and run the business effectively today. The days of launching a fund with the proverbial “two men and a dog” and later becoming highly successful are no more. A management company responsible for managing one strategy and two funds (onshore and offshore) with similar or identical mandates and $500 million to $5 billion in assets could operate out of a single location or office and might only need to employ 10 to 20 people to run the business, build effective internal controls, and provide reporting to investors. A fund that managed more than $5 billion would most likely employ over 100 people and operate in multiple offices and locations around the world with a well-defined business model and diverse functional responsibilities. A private fund manager in the United States may be required to register with the SEC, depending on the assets under management (AUM) of the organization. The rules today require managers to register with the SEC if they manage more than $150 million in assets. Managers with lesser amounts may be required to register with their state authorities under certain conditions. A fund that is managed by a specific fund manager and offered for sale may also be exempt from registration as a security under the 1933 and 1934 Acts if the fund is limited to fewer than 99 investors under safe harbor rule c3-1 or is limited to fewer than 499 investors under safe harbor rule c3-7 and if the investors meet certain qualifications based on income and net worth tests. This allows the funds to be classified as private placements rather than as public securities, which have to follow more onerous regulatory specifications and restrictions similar to mutual funds. Historically, private funds could not be advertised and sales were limited to known investors. The JOBS Act, signed in 2012, has provisions that allow managers
The Basics of Hedge Fund Investing
of private funds to use more advertising and promotions, although few hedge funds have taken advantage of these provisions. All mutual fund managers, including those using hedge fund strategies, are required to register with the SEC, and all mutual funds must comply with the provisions of the Investment Company Act of 1940. Typically, the general partner or management company hired to run a fund by the fund’s board is wholly owned by the founder or senior partners of the firm. The general partner or management company employs the functional experts such as the portfolio manager, trader, director of research, treasurer, risk manager, COO, CFO, CCO, controller, head of information technology, head of human resources, and head of operations. Each department head would employ analysts and staff to support each function. Most organizations are relatively flat, with many direct reporting lines to the general partner, who is usually also the firm’s CIO. The management company earns a fee from the fund for carrying out its responsibilities. The specific roles and responsibilities of each individual supporting a fund vary from firm to firm and from strategy to strategy; however, most funds seek to establish a critical mass by filling certain roles needed to launch and grow the business in a controlled fashion. Without this critical mass, it is difficult for investors to take the fund seriously. When evaluating a fund, it is critical to note whether the following positions are in place, and if not, to ask why. A general partner or owner of the management company, who is usually the firm’s founder and sole equity owner. The GP may also be the CIO and the CEO of the firm. This is usually the case in funds below $1 billion in AUM. A portfolio manager, who is generally a partner or highly paid professional who manages a portion of the portfolio or a particular sector or strategy of the fund and works directly with the CIO in allocating capital and generating ideas. A director of research, who is usually a senior professional or partner responsible for economic, industry, or quantitative research to support the idea generation process and capital allocation among various opportunities. A head trader, who is responsible for efficiently and cost-effectively executing trades, based on instructions from the CIO, portfolio managers, or CIO.
A risk manager, who is responsible for independently evaluating portfolio risk and monitoring risk limits and policies of the fund designed to mitigate losses. A head of information technology, who is responsible for the firm’s desktop, remote, and telephonic environment; the development and maintenance of its software and hardware configuration; and linkages to external service providers, brokers, and investors. A COO, who is responsible for all non-investment-related activities and the day-to-day running of the firm. A CFO, who is responsible for the fund’s financial statements, tax returns, and all record keeping related to both the fund and the management company. A Chief Compliance Officer, who is responsible for the design and effectiveness of the firm’s compliance program, employee training, and regulatory reporting. A head of operations, who is responsible for the day-to-day processing of securities purchases and sales, income collection or payment, fund expenses, borrowing money, reinvesting cash, and reconciling positions with traders, administrators, and brokers. A general counsel, who is the primary legal officer of the firm and is responsible for all internal and external legal matters, including the fund’s offering documents and the firm’s relationships with outside counsel. A head of investor relations, who is responsible for sales and service of the firm’s individual and institutional investors, as well as most of the firm’s communications and reporting to investors. A head of human resources or talent management, who is the person responsible for policies and procedures related to finding, onboarding, and retaining talent at a firm. A treasurer, who is the person responsible for managing the fund’s cash flow, funding lines, credit facilities, and liquidity. Figure 1.2 shows the typical roles and reporting lines for a well-established hedge fund that is managing money on behalf of both high-net-worth individuals and institutional investors. Although all these roles are certainly not essential on day one, most will be added as the funds grow in size and complexity or as they attract more institutional investors.
The Basics of Hedge Fund Investing
General Partner Compliance Legal
Trading and Execution
COO CFO Controller Head of Operations
Risk Management and Technology
Individual Staff Members
Figure 1.2 Hedge Fund Organizational Model
Hedge Funds versus Mutual Funds A mutual fund is a highly regulated investment vehicle managed by a professional investment manager. It aggregates smaller investors into larger pools that create economies of scale and efficiency related to research, commissions, and diversification. Mutual funds have been available to investors in a wide range of asset classes since the mid-1970s and became increasingly popular in the 1980s and 1990s as a result of retail attention, product deregulation, and solid returns. Mutual funds generally cannot use leverage or short selling and generally cannot use most derivatives. Collective investment products originated in the Netherlands in the 18th century, became popular in England and France, and first appeared in the United States in the 1890s. The creation of the Massachusetts Investors’ Trust in Boston heralded the arrival of the modern mutual fund in 1924. The fund went public in 1928, eventually spawning the mutual fund firm known today as MFS Investment Management. State Street Investors started its mutual fund product line in 1924 under the stewardship of Richard Paine, Richard Saltonstall, and Paul Cabot. In 1928, Scudder, Stevens, and Clark launched the first no-load fund. The creation of the Securities and Exchange Commission and the passage of the Securities Act of 1933 and 1934 provided safeguards to protect investors in mutual funds. Mutual funds were required to register with the SEC and provide disclosure in the form of a prospectus. The Investment Company Act of 1940 put in place additional regulations that required more disclosures