Part 7 - Financial Institutions: Investment Funds

Describe what is a « Money Market Fund » and why is it relevant to banks (shadow banking)? (2022 - p.8 - 9 P7)

MMF =

• Short-term investment fund investing in high-quality, liquid instruments (T-bills, commercial paper, repos)

• Offers stable NAV (Net Asset Value) → perceived as "safe as cash"

• Key part of shadow banking system — performs bank-like functions (liquidity, maturity transformation) but outside banking regulation

Why relevant to banks (shadow banking):

• MMFs are major providers of short-term funding to banks (buy banks' commercial paper, CDs)

• Creates interconnectedness → if MMF faces runs, banks lose funding source

• 2008: Reserve Primary Fund "broke the buck" → panic spread to banks → systemic risk

• Regulatory response: MMFs now subject to stricter EU rules (liquidity buffers, redemption gates) to limit contagion risk

• Illustrates how shadow banking amplifies systemic risk beyond traditional banking perimeter

What is the difference between UCITS and AIFMD?

• UCITS: for retail investors; strict rules on eligible assets (listed securities), liquidity (daily redemption), leverage (max 200%), diversification; EU passport for cross-border marketing

• AIFMD: for professional investors only; covers hedge funds, PE, real estate, infrastructure; more flexible investment strategies; still requires registration, risk management disclosure, and leverage reporting

What are investments in Venture Capital? (2023, 2025)

• Equity investment in early-stage, high-growth startups not yet profitable

• Three stages: seed (not yet operational), early (active but unproven), expansion (profitable, seeking growth capital)

• Focus sectors: technology, biotech, fintech, clean energy

• Equity-only, no leverage (unlike PE)

• VC takes minority stakes + provides mentorship, strategic advice, network access

• High risk / high reward — portfolio built on diversification to offset high startup failure rate

• Goal: exit via IPO or trade sale once company has scaled

Difference from PE:

• PE = mature companies, controlling stakes, uses debt

• VC = early-stage, minority stakes, equity only

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