Numeric Investors in the Case Case Study

Excerpt from Case Study :

This is because the majority of investors will more than likely focus on analysts' forecasts and remaining to close company estimates. This is problematic, because it means that investors and traders will tend to under react in the stock. Where, the philosophy that is used by Numeric Investors can spot when changes that are taking place in the momentum of the company early. At which point, they can either go: long or short and then ride the stock all the way up / down. Once this occurs, it means that the overall return is greater, by taking advantage of the different anomalies. ("Numeric Investors," 1997)

The Value Strategy

Over the years, Numeric Investors also discovered that many of different momentum and value orientated stocks moved in a similar fashion. As the strategy could identify what specific stocks would be the best candidates to realize the projected price targets, while ignoring companies that might not be based on any kind of fundamentals (such as: select biotechnology companies). This would help portfolio managers to identify stocks that were more volatile than their underlying fundamentals. At which point, they could determine those companies that have the possibility of seeing increasing or decreasing earnings. Where, managers would look at the correlation of the stock over time and traditional valuation models. This helped to improve their analysis of the company and find those stocks that would outperform the major market averages. ("Numeric Investors," 1997)

How They Monitor and Control Transaction Costs

In general, most investors could be able to purchase some kind of stock index funds or index futures to mirror the same kind of results. To improve the overall return, meant that Numeric Investors would have to control their underlying transaction costs as much as possible. This was accomplished through negating with brokers to narrow the underlying spread between: the bid and ask prices for the stock. Where, the company was receiving a substantial discount in comparison with other firms and investors. This helps to control costs and monitor the overall amount of transactions that they are conducting. However, the success of this strategy has meant that the underlying transaction costs have been increasing, because of the larger blocks of stock that are being purchased (which will have an impact on the execution price). To receive a more favorable return, the company has allowed transaction costs to increase on some trades, so that they can receive the best execution price possible. ("Numeric Investors," 1997)

Is the Decision to close the Firm to new Investment Products Prudent?

The decision to close the firm to new investment products was not prudent. This is because the firm had identified numerous strategies that could play both sides of the market. Where, they were limiting their portfolios, as they are tying up more of investment capital by: purchasing the stock long and short. If Numeric Investors had opened themselves up to new ideas that could augment their current strategies with new ones. This would create new portfolios that would reduce the underlying amounts of risk that they are facing in the markets. For example, if company executives had kept an open mind, they would have discovered that they could use this same philosophy with other investment articles. Where, they could have reduced the underlying risks, by using put options that would mirror the movement of the underlying stock. While at the same time, they could have purchased the long positions outright or call options. This would mean that the company could execute the trades for the actual stock on those positions that are moving towards their profit objectives. This would free up the overall amount of: investment capital and it will give the company greater choices, as to how they can achieve their underlying profit objectives. As a result, this is important, because it shows how the ability to close itself to: new financial products and tools would cause the company to market themselves to a limited number of investors. ("Numeric Investors," 1997)

The ideal amount of money under management for the firm would be between: $300 billion and $800 billion. This is because, the current strategy is limiting the overall amounts of capital that they have under management. If they can increase this number, they have the possibility of being able to: reduce their trading expenses and they could offer investor numerous portfolios following the same basic model. The difference is that it would be augmented with other tools to help: reduce risk and increase the overall returns. Once this occurs, it means that Numeric Investors can be able to reach out to shareholders, by offering unique products that are focused on the fundamentals and momentum of the stock. At which point, the firm will have more influence in being able to: reduce expenses and increase the overall return that they are providing. ("Numeric Investors," 1997)

Clearly, the biggest challenge that Numeric Investors is facing going forward is: that they closed their investment products to new shareholders. This is problematic, because it is placing a cap on the overall amount of money that they have under management and it is limiting the strategies that they are using to increase the overall return. As they are focused mainly on: achieving these objectives through: the valuation and momentum-based computer model. At which point, they will have managers identify various anomalies that are occurring. While this basic philosophy has proven to be successful, the fact of the matter is that numerous investment tools could be utilized to: reduce the underlying amounts of risk, increase the overall return and allow the company to purchase other positions (such as: using options in conjunction with the underlying strategy). This is troublesome, because it is limiting the returns and tools that managers have at their disposal to achieve this objective. At the same time, the inability to increase the number of products and assets under management means that the company is marketing to a limited number of investors. Given the increasing competition in the sector, will cause the company to see a loss of the assets under management. As host of different firms will begin to use other tools that Numeric Investors' portfolio managers' may not have at their disposal. As a result, the company needs to refocus on increasing the total amount of assets that they have under management and the various tools that they are using to reduce risk / increase the overall return. This means that they need to create new products based on: the basic valuation and momentum philosophies that are incorporated with the latest tools into their strategy. This will help to reduce their trading costs and it will increase the number of positions that the company is holding. Once this takes place, it means that…

Sources Used in Document:


Numeric Investors. (1997). Harvard Business School.

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