Numeric Investment Company Harvard Case Solution & Analysis

Q      4-A

Capacity for managing money and assets growth in its funds

Numeric should manage its capacity for money by holding the 100 longed positions in which positions’ size would be $1 billion and from this $100 million investment should be made under management and $10 million with under management. This would result in increasing the growth of assets under management with number of traded shares in any one stock.

Endeavor to mitigate the issue by restraining the pace of trading essentially would bring about a more prominent rate of unexecuted requests which would mean expanded opportunity costs and less constructive execution prices. Likewise, the attempt to mitigate the problem would also be done through holding the expanded portfolios; furthermore the liquid would also result in increased opportunity cost.

Q      5

Advice to Numeric partners concerning the future directions

Partners of the Numeric Investors should revise the existing model and develop new model on the basis of the tenets because in early 1980s investment was based on the earnings fluctuations and analyst’s assessments, which were performed in weeks. This approach has been changed and new approaches came across. These approaches determined the earnings fluctuations and analyst’s assessments within few minutes which made insider trading possible.

Q      6

Summary of Numeric Investment:

Numeric has defined the core tenets for the business on which they performed all the investments and these tenets are defined below:

~        Be good, not big: Numeric stuck to this principle as they wanted to grow in revenue and not in portfolio.

~        Focus on returns, not marketing: Numeric’s focus was on the generation of returns for its customers and not on the marketing because they relied on the marketing which was done by customers’ referrals.

~        Limit asset growth to maintain results: Numeric limited its assets using the long-shot position strategy in which they were buying the long position and selling short.

~        Rely on research and implementation: Numeric Investing was relying on the momentum model and value model which it implemented on its ongoing products.

~        When possible, take performance fees, rather than asset-based fees: Numeric was focused on taking performance fees as it was delivering increased returns to its clients.

Numeric’s philosophy related to efficient market is perfectly aligned because it was generating returns with the level of risk associated investments. Market is efficient if systematic risk is parallel with the returns. Numeric Investing was taking advantage from the in-efficiency of the market. They were performing well in respect with the two models:

~       Value Investing: Value investing exists in an in-efficient market where investments are made either in over-valued stocks or in under-valued stocks. Numeric Investing was investing in this market because they gained the higher returns from it by buying long and selling short in the same stock.

~       Momentum Investing: Momentum investing took place in an efficient market but it took advantage from the in-efficiency of the markets regarding the earnings’ fluctuations using the information flow lag generated among these markets with respect to the analyst’s reviews.

Numeric was short in PepsiCo with 165,100 shares, which were focused around the negative momentum score that made it sensitive with respect to surprise earnings proclamation. Analyst’s normal evaluations for earnings were 24 cents for every offer. PepsiCo affirmed profit of 27 cents per share and the momentum score raised from -0.49 to +1.35 and value score also grew from -0.13 to +.08. Numeric decided to cover 90,500 shares at a price of $34.43 and remaining 25000 shares would be covered after a week at a price of $35.64. Consequently, there was an increase in the prices of PepsiCo’s shares of about $36.2 in May, 1997.........................................

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