The Business Activities Study

This case study is related to the business activities of a falsify storehouse which performs a macro investiture strategy. Its enthronement finances succeedr troy Dexter seeks for loot which arise from shifts in the real economy. As he considers an end of the Australian housing grocery boom as liable(predicate), he anticipates that Australias over alone economic growth will slow d accept, whereas the prices for ability will go up. In reaction to those chances he decides to buy exchequer stays and buy ins of energy companies Against this background Case Study 1 is aimed at classifying Troy Dexters two coronation decisions as either place or substantiating investments. Such a classification provides different results depending on the party from whose perspective it is assessed.Thus, it is the purpose of the following section of this work to distinguish between the terms groom and indirect investment based on the corresponding point of regard using practical illustrati ons whenever possible. This is to be done after clarifying key terms associated therewith first. enclosure definition A hedge depot is an wanglenative investment vehicle which excessively uses financial instruments such as derivatives and leverage and in which an aggressive focussing strategy is usually applied (Fung & Hsieh, 2004). As Capocci and Hbner (2004) state, a hedge storages major purpose is to generate active return (called alpha) for its typically wealthy investor base. As hedge funds are less exposed to capital market regulation than other fund types, they are able to generate on bonny higher returns, but associated with higher trains of try as well (Lederman, 2012).Troys decision to purchase energy stocks is related to his expectation of rising crude oil prices. Given his expectation turns out to be correct, the constituent price of oil producing companies will increase. The term energy stock market, however, comprises not only oil producing companies, but all other assortments of energy producing firms, as well as energy infrastructure and energy service providers, too (Henriques & Sadorsky, 2008). As Henriques and Sadorsky (2008) note, a rise in the oil price will not only increase the share price of oil and gas producers, but also the market value of those firms which offer substitutes (e.g. solar and wind energy) will increase. This holds as their products become more competitive in such an environment and their turnover is likely to increase. Stockholders who hand over purchased such stocks directly for their receive stock portfolio before a rise in the oil price has taken place, will profit. Their profits, on the one hand, consist of the 4 chance to al mass those shares at a higher price at the stock market and, on the other hand, of (increased) dividend payments (Bodie, 2013).Treasury bonds purchased in the debt market are usually characterized by less risk than whatever kind of stock market investment (Sharpe et al., 1999 ). Given Troys expectation about the future economic environment of Australia, his decision to purchase such long-term fixed interest debt instruments is reasonable. This holds as they are issued by the Australian government which is very unlikely to default (Chaudhuri Smiles, 2004). On the contrary, as the Australian government has several tools at hand which allows it to make interest payments as promised (e.g. increase taxes), a treasury bond is considered as one of the safest investment forms on hand(predicate) in the market (Hull et al., 2005). Investors who have decided to hold treasury bonds in their stock portfolio (direct security investment) evoke expect a fixed interest on their investment. The historic development of the Australian 10-year treasury bond is illustrated below. Source Reserve shore of Australia, 2017.From this graph it quarter be derived that the long term trend of Australian treasury bonds is downward sloping. Starting from a level of more than 10.0% in 1995, the interest rate went down to about 3.0% in 2013. Interest rates in the short run are stagnating on a relatively low level of about 3.0%. Based on the fact that Troy Dexter has founded the hedge fund in 2009, it can be stated that his decision was right in the short run Interest rates, indeed, went up from 4.0% to 6.0% between January 2009 and January 2010. However, it has to be tell that in the subsequent years his expectation turned out to be incorrect Starting from January 2011, interest rates on the Australian 10-year treasury bond went down to about 3.0% in January 2013. This implies for Troy Dexter as the fund manager that his hedge fund may have generated losses from 2011 onwards as the interest rate of Australian treasury bonds have lacked his expectations.The figure adds value to the topic of this work as it illustrates that the fund managers decision to invest in treasury bonds could not have been a smart decision in the long run Fund investors are indirectly s uffering from this decision as they have decided to provide Troy Dexter with parts of their funds which are now invested in a non-optimal security. 1. Direct vs. indirect securities Northwest Capital steering perspective In order to classify Northwest Capital Managements investments in treasury bonds and energy stocks from the firms perspective, one has to understand the business concept of capital heed firms first.Firms such as Troy Dexters hedge fund business aim at professionally managing hush-hush investors funds. They do so by investing customers cash in a broad range of asset classes, restricted by particular investment tendencys (Fung Hsieh, 2001). However, as Brav et al. (2010) notice, the service such firms provide is not precisely related to the optimum asset allocation, but financial statement analysis as well as the monitoring of existing investments plays an all important(p) role, too. Hedge funds in contrast to more conservative capital management firms inve st a relatively high percentage of its assets in risky asset classes such as the stock market of even emerging market economies (Jansen et al., 1998).The portfolio composition of an exemplary hedge fund is illustrated in the graph below. Source Blair, 2001. The figure supra already reveals that it is the hedge fund manager Troy Dexter who is responsible for the investment decisions of his fund and who chooses between the above asset classes (asset allocation).It is important to understand that the private investor is not involved in the daily investment process of the hedge fund, but hands over any responsibility for the invested amount of money to Troy Dexter. 0.50% 0.50% 31% 19% 15% 14% 7% 6% 3% 2% 2% Strategy composition of a hedge fund footling selling Other Equity long/short Macro Relative value arbitrage Event driven Fixed income Convertible arbitrage disturbed securities/high yield Equity markets neutral Emerging markets 6 Derived from this line of reasoning it can be state d that Troy Dexters intended purchase of treasury bonds and energy stocks can be considered as a direct securities investment from the firms point of view. This holds, because there is no third party involved in Troys securities encyclopaedism process (Bodie, 2013).In contrast, it is likely to be assumed that Troy himself owns a trading platform which he can use to exercise any stock market transactions personally and immediately. Even if Troy does not own such a trading platform, the consultation of a stock broker can still be considered as a direct securities investment from Northwest Capital Managements point of view. This holds because a stock broker can simply be considered as an entity which executes buy and sell orders on behalf of someone else for a particular fee or commission (Pollock et al., 2004). As Pollock et al. (2014) note, brokers are not allowed to alter the order, but execute the transaction only. 2. Direct vs. indirect securities Investor perspective Taking the viewpoint of an investor in Troy Dexters hedge fund, Troys investment decisions can clearly be considered as indirect investments.As stated above, the fund manager decides about the allocation across available asset classes. The investor knows about the financial risks tied to Troys investment decisions from the prospectus and may have expectations about a desired return, but cannot alter Troys daily sell and buy orders. However, this would be a vitally important characteristic of a direct securities investment. As soon as customers have decided to invest in the fund, they have to sign a declaration of try for in which they transfer the responsibility for managing their funds to the portfolio management team (in our case to Troy Dexter) (Philpot Jonson, 2007). Not the investors themselves engage a broker who carries out financial market transactions, but Troy Dexter does that on behalf of them using his financial market knowledge. In this context it is important to note that alt hough restrictions are less strict in a hedge fund fund managers have to stick to the proposed fund objective and are not allowed to invest in anything which is not related to the praised goal of the fund, although it may be a lucrative investment (Philpot Jonson, 2007). This assignment of any kind of right to alter the investment decision related to maximizing investors own monetary wealth underpins the indirect nature of a fund investment from an investors point of view.The incentives for customers of Northwest Capital Management to provide Troy Dexter with the rights to manage their savings on behalf of them (indirect investment) is related to Troy Dexters expertise about financial markets (Capon et al., 1996). Additionally, as Capon et al. (1996) state, the pooling of large amounts of money in the hedge fund provides customers with a lot more market power than they would have when investing on their own. This shows that although private investors cannot actively decide about each investment decision on their own, the indirect securities investment through Troy Dexters Northwest Capital Management is utterly worthwhile for its investor base. It can be summarized that investing in a hedge fund implies no direct securities investment from the private investors perspective. This is compounded by the fact that private investors of a hedge fund do not own any securities themselves (Droms & Walker, 1996).Instead, those securities are entirely controlled by the fund managers who either own a trading platform themselves or contact brokers to carry out deals which are likely to benefit the funds investor base. Shareholders are not able to access the funds existing investments on a daily basis, but have to rely on the fund managers expertise (Droms Walker, 1996). This trust, however, may be the basis for higher returns compared to investing individually on any kind of capital market. 7 Furthermore, the indirect securities investment from the investors point of vi ew implies that each single investor gains or loses proportionally to his or her investment in Troy Dexters hedge fund.This fact stands in sharp contrast to a direct securities investment in which an investor is on his own and has a claim on any gains and losses related to this investment (Bodie, 2013). Instead of having the chance to convert profits right away in a direct securities investment, an indirect investment via a fund prohibits an investor from this right and makes him dependent on the decisions of the fund manager. Recommendations A harsh way of how to classify securities is to divide them into either direct or indirect securities. In this context it is of particular importance to distinguish between either an investment managers or a private investors perspective (Davis, 2004).Conclusion The statements above have shown that the classification of any kind of investment as being either direct or indirect depends on the party from whose perspective such a classification i s made. In the case of a hedge fund one can categorize an investment as an indirect one from the investor perspective and as a direct one from the fund managers perspective. This holds as it is not the investor who makes any kind of investment decision, but the fund manager on his behalf. The investor puts trust in the fund managers capital market expertise when deciding to invest in a fund and at the same time cedes any kind of rights to alter the fund managers perspective on the future development of the capital market. 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