Investment In Direct And Indirect Securities With Hedge Fund

Investment Options for Northwest Capital Management

With the increasing ramification of economic business conditions and investors inclination towards financial market, it is observed that investors have to analysis various internal and external factors before investing their money in securities. Ideally, securities are issued by organizations for raising funds for their business. It is observed that sometime with the increasing complexity of scriptures in market, it becomes cumbersome for the investors to decide in which securities they should invest their money. Therefore, they take assistance from mutual funds or hedge funds to invest their capital amount in market. These hedge funds help investors to manage market risk and other external factors threats in determined approach. In this report, hedge funds have been used by Troy Dexter who is venture capitalist for investing money in market in order to earn high return. There are several direct and indirect securities which could be defined on the basis of investor’s perspectives. Hedge funds are used by Troy to invest in diverse range of assets and deploy various investment strategies to maintain hedged portfolio which is used to create shield from the downturn in the market (Aiken, et al. 2016).

1. It is evaluated that Troy Dexter who is venture capitalist has incorporated new hedge fund company. The name of newly developed hedge fund company is Northwest Capital management. This hedge fund is designed by Troy Dexter to minimize all the possible risks and hedge all the external risks so that high amount of return could be drawn from the invested amount. Moreover, Northwest Capital management has been incorporated by Troy Dexter for making investment in direct securities. This is the newly introduced hedge fund which is incorporated with a view to increase the return and at the same time minimizing the risks (Kitsul and Ochoa, 2016). Northwest Capital management has invested its money in two securities such as treasury bonds and Energy stocks.

Treasury Bonds- It is the government securities which provides zero amount of risk and less return as compare to market equities.

Energy Stock- These are the securities which have high risk and high return. Ideally, investors who like to take high risk and want to earn high profit makes investment in this type of securities (Parwada Rui, and Shen, 2016).

In this case study, Troy after incorporating Northwest Capital management has created hedge for all the risks involved in invested securities in determined approach. It is evaluated that if Troy deployed hedge funds then it would help him to counter all the negative impacts of external and economical factors (Cao Chen, Goetzmann and Liang, 2016).

Direct and Indirect Securities

Financial market is accompanied with several securities and scriptures which are used by investors to create value on their investments.  In order to determine whether the securities are direct and indirect depends upon the investors and their purpose.  This could be determined with the help of example. For instance, if investment is securities is made by investors own their own name then all the securities in which investment is made, called direct securities. On the other hand, if investment is made in the some mutual funds and other property by portfolio manager on the behalf of investors then it would be called indirect securities for investors (Song, 2016).

Direct Securities- These are the securities in which investors directly invested their money with their own name. These could be equity share of company, debentures and other scriptures. Ideally, it is observed that when investors make direct investment in buying direct securities then they may face high loss due to their unprofessional way to measure the return of securities. If they take professional advice such as hiring portfolio managers, investing in mutual funds and hedge funds then they would tend to have less loss as compare to their direct investing methods (Robison, Barry & Myers, 2015).

Indirect Securities- These are the scriptures which are purchased by hedge funds or mutual funds on the behalf of investors. These securities become indirect securities for those investors who money is invested. However, these securities would be counted as indirect securities for investors whose amount is invested and direct securities for mutual funds or hedge fund who has invested their money with their own name.

Analysis        

This analysis has been made to determine whether these securities are direct or indirect. In this case study, it could be evaluated that as per the perspective of Northwest Capital management these both securities would be direct securities. Northwest Capital management has invested money in both securities with its own name. However, the same securities have been bought by Troy on the behalf of investors who has given their money for investing in Northwest Capital management. In addition to this, in order to determine whether these both securities are direct or indirect, there is need to determine who has bought these securities and with whose name. For instance if investors have invested their money in mutual funds or in some kind of investing company then the securities purchased by that mutual funds or investing company on their behalf would be classified as indirect securities. Therefore, in simple words, securities purchased by investors directly in market would be classified as direct securities (Moran, 2016).

Analysis of the Direct or Indirect Nature of Northwest Capital’s Securities

Now it would be inferred that these both securities would be direct securities from the point of view of Northwest capital management.

2. In this question, it is determined that whether the securities purchased by Northwest Capital management is direct securities or indirect securities for the investors whose money have been used to buy the securities in market. Northwest Capital management is hedge fund which is incorporated by Troy with a view to hedge all the possible risk in market. It is considered that Northwest Capital management is accompanied with several professional advisors who take care of all the external factors before investing their money. In this case study, it is considered that Ms. Investor has invested its money in Northwest Capital management for creating value on her investment. After that Northwest Capital management invested her money to buy two securities government bonds and energy stocks with their own name. Therefore, it would be inferred that these securities would be direct securities for Northwest Capital management and indirect securities for Ms. Investor. This could be better understood with the help of below given example.

Direct Securities- These are the securities which are purchased by investors directly from the market. In this case, Northwest Capital management has invested money directly in the market with its own name. Therefore, these securities would be considered as direct securities for Northwest Capital management.

Indirect Securities- These are the securities which are purchased by some other person on the behalf of investors. In this case, Northwest Capital management has purchased two securities namely energy stocks and government securities from the market on the behalf of investors with their own name. Therefore, these securities would be considered as indirect securities for Ms Investors whose money has been invested by Northwest Capital management in buying these two securities.

Result

There are several facts and factors which are used to determine whether the securities are direct securities or indirect securities. After evaluating this case, it is determined that Northwest Capital management has invested Ms Investor money in buying two securities with their own name. Therefore, it would infer that nature of direct and indirect securities would depends upon the methods of investing money for buying scriptures and securities (Adusumilli, Davis and Fromme, 2016).

Conclusion

This report helps investors to determine the nature of securities in which they invest their money. In this report, there are two types of securities namely direct and indirect securities. This report contains various factors and issues for deciding whether the invested amount is direct securities or indirect securities. Now in the end it would be concluded that securities invested in the business functioning of organization would be direct securities for Northwest Capital management and the same would be deemed to be indirect securities. (Baginski & Hinson, 2016).

Capital Budgeting Tools

Overview

This question is used to determine all the valuable factors of capital budgeting tools. It is evaluated that Norwich Tool Company has two investment proposals. This analysis prepared will help investors to determine which of the one option out of two would be beneficial for the organizations. It is observed that if Norwich tool large lathe machine shops install these lathe machines then it would make productivity higher (Rad, et al. 2016).

Payback period- This is period which reflects the time which would be required to cover all the cash outflow. It is computed that Lathe-A has lower pay back period as compare to Lathe-B (Lettau &Ludvigson, 2011).

Lathe-A

 Lathe-B

(Blidaru, &Blidaru, 2015)

 After considering all these data, it would be inferred that Lathe-A should be installed by Norwich tool large lathe machine shops (Drobetz &Merikas, 2013).

Computation of NPV and IRR of Lathe-A

 (McCarthy, 2016).

Computation of Lathe-B

NPV= It stands for Net present value. It is the amount of difference between cash outflow and cash inflow (Blackall, Sykes, Telford and Baker, 2016).

NPV= P.V. of Cash Inflow- P.V. of Cash Outflow

IRR- This is the minimum required rate of return which should be earned by company from its new project.

After considering NPV and IRR of both projects, it is evaluated that Norwich tool large lathe machine shops should adopt Lathe-B in its business functioning (Easley &O’Hara, 2014).

Recommendation in two following cases

When the Funds are Unlimited-

When Norwich tool large lathe machine shops are having unlimited funds then it should invest its money in Lathe-B. It is evaluated that Lathe –B provides higher return and has high level of net present value as compare to Lathe-A. Nonetheless, Lathe-A has lower pay back period which would not be considered when Norwich tool large lathe machine shops  is having unlimited funds (Kinglier, 2016).

When there is Capital Rationing

When Norwich tool large lathe machine shop is having limited capital then it should invest its money in the project which has low level of cash outflow and helps company to recover the entire cash outflow in shorter time span. Therefore, Lathe-A has low investment amount and helps company to cover all the investment in shorter span of time (Gourmet, 2014).

References

Adusumilli, N., Davis, S. and Fromme, D., (2016). Economic evaluation of using surge valves in furrow irrigation of row crops in Louisiana: A net present value approach. Agricultural Water Management, 174, pp.61-65.

Aiken, A.L., Clifford, C.P., Ellis, J.A. and Huang, Q., (2016). Funding Liquidity Risk and the Dynamics of Hedge Fund Lockups.

Baginski, S. P., & Hinson, L. A. (2016). Cost of capital free-riders. The Accounting Review, 91(5), 1291-1313. doi:10.2308/accr-51379

Blackall, D., Sykes, J., Telford, J. and Baker, C., (2016). Trio hedge funds: Government regulators and the public’s right to know. Precedent (Sydney, NSW), (134), p.33.

Blidaru, G., &Blidaru, D. M. (2015). Financial management verification – occurrence – development, objectives. ValahianJournal of Economic Studies, 6(4), 107.

Cao, C., Chen, Y., Goetzmann, W.N. and Liang, B., 2016. The role of hedge funds in the security price formation process.

Drobetz, W., &Merikas, A. G. (2013). Maritime financial management. Transportation Research Part E: Logistics and Transportation Review, 52, 1-2. doi:10.1016/j.tre.2012.11.005

Easley, D., &O’hara, M. (2014). Information and the cost of capital. The Journal of Finance, 59(4), 1553-1583. doi:10.1111/j.1540-6261.2004.00672.x

Guermat, C. (2014). Yes, the CAPM is testable. Journal of Banking & Finance, 46, 31-42. doi:10.1016/j.jbankfin.2014.05.001

Kitsul, Y. and Ochoa, M., (2016). Funding Liquidity Risk and the Cross-section of MBS Returns.

Klingler, S., (2016). High Funding Risk, Low Return. Browser Download This Paper.

Lettau, M., &Ludvigson, S. (2011). Resurrecting the (C)CAPM: A Cross?Sectional test when risk premia are Time?Varying. Journal of Political Economy, 109(6), 1238-1287. doi:10.1086/323282

McCarthy, S., 2016. Magic Timber and Steel: Investment Evaluation with Net Present Value.

Moran, A. (2016). The financial management of agile projects. Itnow, 58(3), 60-61. doi:10.1093/itnow/bww086

Neslihanoglu, S., Sogiakas, V., McColl, J. H., & Lee, D. (2016). Nonlinearities in the CAPM: Evidence from developed and emerging markets: Nonlinearities in the CAPM. Journal of Forecasting, , n/a. doi:10.1002/for.2389

Parwada, J.T., Rui, Y. and Shen, J., (2016). Hedge Fund Ownership, Funding Liquidity Constraints and Excess Return Co-Movement.

Rad, M.S., Jamili, A., Tavakkoli-Moghaddam, R. and Paknahad, M., (2016) January. Resource Constraint Project Scheduling to meet Net Present Value and quality objectives of the program. In Industrial Engineering (ICIE), 2016 12th International Conference on (pp. 58-62). IEEE.

Robison, L. J., Barry, P. J., & Myers, R. J. (2015). Consistent IRR and NPV rankings. Agricultural Finance Review, 75(4), 499-513. doi:10.1108/AFR-06-2015-002

Song, Y., (2016). Dealer Funding Costs: Implications for the Term Structure of Dividend Risk Premia. Browser Download This Paper.

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