Wall Street Managers: The Art of Making Money Research Paper

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Introduction

Wall Street managers are some of the most highly regarded individuals in the securities industry. Their grasp of the financial market is established and well-known. In a more technical aspect, Wall Street managers are called investment or money managers. In terms of education, Wall Street managers are highly regarded learners. There is a special learning process that is only exclusive to Wall Street managers. Wall Street managers have a reputation as experts in numbers and economic fundamentals. But success in the industry requires a deeper understanding of financial markets.

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The success of Wall Street managers is dependent on several aspects. Most Wall Street managers depend on their philosophy. Rigorous training is one of the foundations of investment philosophy. Wall Managers can base their investments on what is available plus all aspects that can affect the gains from the investment. There are also processes that these managers implement. Some Wall Street managers provide systematic methods while others prefer circumstantial approaches.

Money management is a primary task that most Wall Street managers perform. There several ways in which this is manifested. Conventional forms have been developed as well as other rational schemes. In the end, the goal of Wall Street managers is to ensure optimal returns in all of their investments. This is usually done in an environment where there is limited information and constant change. Moreover, the industries where Wall Street managers operate are embedded with rules that are strictly implemented.

Objectives of the Study

The primary purpose of this paper is to assess the different methods by which Wall Street managers handle money. In this study, money is referred to as the investments decided by the managers. The process of the study involves revisiting literature related to investment management. These articles will be evaluated about the Wall Street managers. Studies that tackle financial methodologies and non-financial aspects will be discussed. Moreover, the study will also provide some suggestions for future studies. These proposals will center on methods used by Wall Street managers to realize huge investment gains.

Study Background

The role of Wall Street managers differs accordingly. The evolution of Wall Street managers is etched in the history of financial markets. But their decisions have a similar impact on firms. The moves made by Wall Street managers either spell success or failure. In addition, several investors rely on these managerial decisions. Wall Street managers are hired because of their ability to make more money. Their knowledge of the market and vast experience are valuable to investors.

Money-making on Wall Street means creating a sound investment portfolio. This is the most challenging task that most investment managers face. There are several aspects that Wall Street managers consider before making investments. These include rewards, risks, and other economic catalysts. Moreover, some managers value timing in making investments. The financial market provides unlimited opportunities for managers to boost their money supply.

Most Wall Street managers are well-versed with financial figures. Statistics has been a primary tool used to determine investment viability. In addition, most of the training experienced by these managers is founded on financial statements. Since money is a financial entity, it is a common strategy for managers to make use of financial ratios. Although there are several criticisms of this practice, several managers have remained promoters of financial analysis. From this form of analysis, other methods evolved. Wall Street managers are significant contributors to the creation of these techniques.

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Some Wall Street managers have been creative in making money from their investments. These managers mostly rely on patterns and movements instead of fundamentals. Wall Street managers have evolved into technical analysts. Managers study trends and price behavior in making investment decisions. Aside from technical managers, some are purely risk-takers. These managers, however, have gained both praise and infamy for being such. History suggests that managers who take risks have enjoyed huge rewards. At the same time, their practices have also led to big losses.

There are Wall Street managers that are meticulous in handling their investment. Most are managers are detailed and value all information available. Other managers prefer safe investments. These are managers who focus on blue-chip stocks and risk-free bonds. Moreover, some managers ensure that all financial markets are covered. These managers ensure that their portfolio is spread over different investment vehicles. Such a strategy has been prevalently used at present.

Significance of the Study

There are valuable insights that can be gained from this research. First, learning the methods of Wall Street managers is important. It provides a clear picture to investors of how these managers improve their investments. Money is an issue, especially when talking about managers. Understanding the role of Wall Street managers entails the knowledge of their processes. The success that these managers are enjoying needs to be analyzed. Their expertise in the field of money can potentially aid other aspirants to be the same.

This study will also lead to many further studies on how Wall Street manager handle their money. Most literature focus on results and justifications. Aside from providing empirical evidence, this study will further examine the value of these money-making methods to normal investors. It is interesting to compare and contrast strategies used by Wall Street managers to boost investment returns. In addition, how these techniques have evolved is a vital point of discussion. This research attempts to provide layman understanding to the seemingly complex realm of Wall Street managers.

The importance of this study is explained by the center of discussion. Money, as explained it the primary topic in this research. Studying money creation using expert perspectives is important. It provides ideas that can be used even in non-financial situations. Moreover, investors need to understand that making money in the market is hard. These Wall Street managers have devoted their time and effort to increase their resources. Yet some fail to beef up their investments.

The rationale of the Study

The study is conducted on the notion that Wall Street managers exist because money needs to be increased. From an investor perspective, Wall Street managers operate to increase their investments. Given that assumption, it is important to evaluate previous studies involving Wall Street managers. In particular, some researches highlight specific techniques used by managers to improve investment positions. The idea that Wall Street managers need to make money is a strong basis for this study.

Another concept that serves as the basis for this research is the diversity in methods used by Wall Street managers. Because of the unpredictable trends in financial markets, managers have devised ways to make fast adjustments. In truth, there is no absolute method in earnings from these investments. The study revolves around the belief that there are several methods in which success is achieved by Wall Street managers. Studying these techniques is a concept that needs to be emphasized.

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Data Limitations

There are some limitations about the data that need to be highlighted. The information used for discussion is based on studies made on Wall Street managers. It is important to note that the conduct of the study must be after 1980. New data is needed because some concepts are already deemed obsolete. Moreover, the discussion will also include some results taken from these researches. But the process of evaluation will be limited to the outcome as presented in the data gathered.

Review of Related Literature

This chapter will tackle the various literature that will serve as a guide throughout the discussions. The chapter highlights relevant literature that is both, directly and indirectly, influential to the subject discussed. This chapter will assess the extent of research that has been conducted related to the topic. The scope covered by the subject suggests that several explanations were documented before the research came to the period of conception. Moreover, this chapter links the gathered information to the justifications made in subsequent stages of the study.

Statistical Process

Several traditional statistical concepts and techniques were developed in response to changing business environments. Wall Street managers consider statistical tools to compare the evolution of these industries. For instance, current asset management, advanced manufacturing, and high-technology industries operate in highly uncertain conditions. These changes have important implications for research directions in applied statistics, which are crucial in making sound investment decisions (Spencer and Tobias, 1995).

The normality test ascertains the distribution of the samples. To test for the normality, a Quantile-Quantile (QQ) Plot will be provided. The assumptions for the method presuppose that: H0 – the distribution of the samples is normal distribution; and H1 – the distribution of the samples is not normally distributed (Table 1A). The normality of the sample is determined through the observance of the proximity of the point in the line as shown in the QQ Plot.

The prices of the samples indicate that the samples are indeed non-normal (Table 1B). Using the prices as an indicator for differences, the statistical method has to utilize the Mann Whitney because of the non-normal result.

The QQ plot suggests that the points are away from the line. Based on physical observation, no point has contacted the line. The result maintains that the samples are non-normal thus require different statistical approaches from the methods used in normal samples (Table 1C). The market capitalization of the samples indicates a non-normal behavior. Most of the points are moving away from the line as shown in the QQ Plot (Table 1D).

To explain the normality of the samples, the Kolmogorov-Smirnov analysis was used. Results that post a significance level of less than.05 are rejected. This means that the samples based on the results of the indicators are non-normal. This conclusion is supported by the Shapiro-Wilk analysis that also rejects results with a significance level below.05 (Figure 1A). The analysis then shifts to the determination of whether the two sectors can be analyzed as a single entity.

This is established to further strengthen the analysis and improve the credibility of the results. The Wilcoxon Mann-Whitney Test is one of the most powerful nonparametric tests for comparing two populations (Figure 1B). It is used to test the null hypothesis that two populations have identical distribution functions against the alternative hypothesis that the two distribution functions differ only concerning location median. This test can also be applied when the observations in a sample of data are ranks including the ordinal data instead of the direct measurements.

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Passive Management

There are several strategies that Wall Street managers use to ensure maximum return of investments. Malkiel (2003) introduced the notion that fund managers are passive. The primary component of this strategy involves indexing. This method is proven to be effective since most security markets are deemed as efficient. These markets are prone to absorb new information. Moreover, it is hard to prove that patterns from past results are capable of forecasting price movements of securities.

Empirical evidence shows that index funds have outperformed actively managed funds over a 10 –year course. During the 2001 U.S. stock debacle, there are concerns about the overinvestment in index funds (Figure 2A). But as figures suggest, the majority of these index funds have outperformed actively managed funds. There are also tendencies for Wall Street managers to diversify their portfolios. Based on the count in 1972 355 fund managers have diversified portfolios. Half of the funds failed to provide adequate returns (Figure 2B). This result shows that inactive funds fared during the specified period.

Malkiel (2003) highlighted the indexing of funds using a 10-year term to gauge performance. These funds were classified according to the capitalization category of stocks. Most of the funds have recorded a significant increase in value. The other provided hints of long-term growth rates. Most important, 9 out of the 10 selected funds have outperformed actively managed funds. Indexing of funds is considered a winning strategy for managers in the U.S. and Europe. Such observation is also accurate when Wall Street managers invest in bonds.

Fund Exposure

There is a common assertion that Wall Street managers allocate their resources to several securities. Wall Street managers are interested in the amount to be invested in a wide range of securities and the exposure to each form of security. Managers usually analyze fund exposure using a comprehensive analysis of securities in a fund. This process allows managers to evaluate the extent of resource allocation in a portfolio. Managers also rely on outside information to determine the proper allocation of securities in their portfolios.

There are several analytic methods used to determine fund exposure. Some managers rely on quadratic programming to ascertain changes in returns as affected by asset classes (Sharpe, 1992). Most managers want to find out the best group of securities. These assets have to conform to some policies determined by the market. Managers determine the difference between the return of the asset and the passive portfolio. The difference is then equated using style analysis to reduce the variance. The difference is technically referred to as the tracking error and the variance tracking variance (Table 3).

Wall Street managers at times misinterpret this method as a form of determining the average value of the difference. In addition, the analysis form cannot make an investment fund appear worth investing in. The specific goal of this process is to emphasize the securities’ exposure to variations about the return of asset classes. Aside from the style analysis, the use of Markowitz’s critical line method is also valuable. Fund managers recognized that this process makes use of simpler methods (Sharpe, 1992).

Non – Financial Aspects

The notion of investment efficiency is dependent on risk, returns, and the cost of investments. Most Wall Street managers implement investment policies using investment management structures. The decisions made by Wall Street managers are based on several financial and non-financial constraints. Hodgson et al. (2000) maintain the need to go beyond risk in creating these structures. The study conducted by the group focused on highlighting the non-financial issues concerning investment structures.

The development of investment management starts with the asset planning cycle (Figure 4). Most Wall Street managers recognize the need for such plans to be drafted. For fund managers, the cycle allows the groups to ascertain their objectives. Then managers have to provide strategies for effective asset allocation. This will allow the creation of a structure for investment management. Managers are also allowed to select personnel to handle the investments. In this process, monitoring results is a must-do activity.

The empirical evidence determines the value of non-financial aspects in making investment decisions. Results indicate that managers consider non-financial terms in creating investment structures (Table 4). For instance, managers in Japan are greatly influenced by beliefs based on previous decisions. This trend can be explained by the level of uncertainty attached to the financial components of investment. Some managers are more attached to decisions that have resulted in significant growth. The tangibility of these non-financial circumstances is more valued than unpredictable financial gains.

Real Options

Complex problems dealing with investments have complicated cash flows. Juan et al. (2000) attempt to use Scenarios-Monte Carlo to determine high-dimensional problems related to Real Options. The process is taken from scenarios spaces created at the individual exercise dates. The method also includes modification of the payoff function based on options. In addition, the study will use some algorithm functions. This is necessary to ensure that problems are solved concerning preferred investment policy.

Using the scenarios-Monte Carlo method, the net present value of the investment was determined. The values extracted from this procedure are used for real problem valuation (Figure 5A). The Monte-Carlo simulation method has resulted in several net present values. The values are distributed using discrete probability to obtain the expected returns on investment. The study also weighed the returns on investment based on various algorithmic assumptions. Based on the results, the value of the investment is equivalent to the specified payoff function. This function is a unique scenario at a particular date (Figure 5B).

After the value of the investment was ascertained, the study also tackled the issues that will be raised to the manager. The first part of the process involved stating the decision problem. The second component is focused on the results gained from such a process. This study was important as it highlighted the relevance of decision-making once the value of the investment is determined. Wall Street managers need to move to the next level after their processes have specified the level of gains from each investment.

Plan Sponsors

Goyal (2006) studies the termination and selection of investment managers by the plan sponsor. Plan sponsors usually hire investment managers after significant returns. Underperformance is often viewed as the reason for plan sponsors to fire investment managers. Sample data was obtained from a system developed by Mercer Investment Consulting. Only plan sponsors based in the U.S. were considered in the study. Matching of samples was done through the use of several databases.

Results show that 21% of the hiring decisions were based on corporate plan sponsors. This chunk represents 1,978 managers from a total of 9,214 managers. The mean size of the sponsors reached $1.6 billion. A time series of hiring decisions shows even distribution of hiring through time. But there is a diminishing trend in hiring starting 2001 onwards. This reduction is explained by the emergence of alternative assets. Most managers during the stated period were hired to handle these forms of investments. The majority of the hiring was focused on domestic equity mandates (Table 6A).

There were a total of 910 termination samples covered by the research. The time series analysis reveals that the termination has increased over time. The spike has explained the increase in data gathered by the database. Like the previous example, termination has been within domestic equity mandates. Some 32 percent of termination incidences were based on performance. At least 102 terminations were classified as reallocation changes. Corporate events such as mergers and regulatory decisions also affect termination figures (Table 6B).

Derivatives

Most Wall Street managers have been exposed to the value of derivatives in realizing investment gains. Derivatives usually provide non-linear returns providing return profiles that are not achieved using other investment tools. Lhabitant (2000) seeks to provide an overview of the performance measures when applied with options. The study assumes that an efficient market index fails to affect option-based portfolios. This will also show the capacity of managers to provide different mechanisms to achieve high investment returns.

After performing statistical simulations, the results were presented in Figures 7A and 7B. These figures illustrate the rate of return and volatility for three strategies related to options. In a usual securities environment, choosing a high strike price will push expected gains and volatility upwards. On the other hand, protective put buying hurts the rate of returns and volatility. The Sharpe ratio decreases there is an increase in the exercise price of a protective put position. This happens when a position is moved from stock to a risk-free bond. In effect, the protective put has a stock ratio lower than the long stock Sharpe ratio.

The increase of an exercise price of a covered call position moves a bond to a stock position. In this instance, the Sharpe ratio increases. For Wall Street managers, there are two views related to these findings. Managers will deviate from buying puts unless protected put position is evident. Moreover, some Wall Street managers may opt to dispose of out-of-the-money cover calls. This strategy maintains a dominant stock position. Stocks that are part of the market index dominate the efficient side in the mean-variance realm.

Relationship Centric Investment

The role of individual investors is critical in the success of Wall Street Managers. Forming relationships with these clients is necessary. In addition, summing up the contribution of these individuals to the gains of the investments is important. Johnson and Selnes (2004) introduce a process the values client contribution to investment decisions. In particular, the CPLV model was used to determine the impact of relationships on success. This adheres to the assumption that increases in market size boost investments.

The study used several scenario simulations to achieve its goals. The first scenario provides a situation where the economies of scale are below the baseline. Results suggest that as the economies of scale decrease, the aggregate CPLV diminishes significantly. The baseline scenario provides a $448 million gain while it drops to $218 million as economies of scale decrease (Table 8A). It is also evident that the contributions of acquaintances are more prone to changes in economies of scale. Both contributions from partners and friends have increased when the economies of scale were applied (Table 8B).

For Wall Street managers, this serves as a valuable insight for future investment decisions. The superficial relationships with acquaintances make this group an unpredictable source of investment gains. Friends and partners, however, are critical arms that can boost investment gains. Wall Street managers have to evaluate its process in developing relationships. These individuals can potentially change their fortunes in the market. Their contributions to investment decisions are critical.

Portfolio Management

The role of portfolio management in making investment decisions is established. Cooper, et al. (2001) presented some evidence that supports the stated notion. Although the survey has encompassed other industries, the dominance of financial views is evident. Based on the results of Figure 9A, corporate managers find portfolio management important. One of the major reasons that make portfolio management important is its capacity to maintain a Wall Manager’s competitive position (Figure 9B).

To further underline the importance of portfolio management, managers consider it as a viable financial tool. Such an instrument can be used to improve the money supply and maximize returns on investments. Among the portfolios management styles used, the majority are financially related. This shows the dominance of portfolio management in the financial transactions of firms (Figure 9C). In addition, the capabilities of Wall Street managers to implement sound portfolio management techniques are vital. These processes can provide managers with high returns and low costs.

The survey results show some important points on how Wall Street managers moderate money flow. Most managers are systematic as evidenced by the high recognition of portfolio management. Managers consider portfolio management as a holistic strategy. It can be used to improve return on investments and in other activities. Portfolio management has evolved into a method that Wall Street managers do value. Therefore these processes must be continuously developed and promoted.

Capital Asset Pricing Model

The capital asset pricing model (CAPM) is a theoretical model that ascertains the correct rate of return of an asset. It follows the condition that the asset is to be supplemented in a well-diverse portfolio and the asset has no-diversifiable risks. The security market line was used in connection to expected return and systematic risk to illustrate how the market will price individual securities considering their risk classifications. The security market line enables analysts to compute the reward-to-risk ratio for any security about the overall market.

Lackman (1996) conducted a study involving the use of CAPM in the analysis of foreign exchange risk. Wall Street managers consider foreign exchange as a vital component of the capital market. The study assumes that the gains from investment accurately describe the result of an investment. In addition, the risk attached to the investment is proportional to the returns expected by the fund manager. Moreover, the investment decision is based on the expected rate of return and the standard deviation related to the return.

The study determined the efficient frontier through the maximization of gains from investment. This follows the notion that there is an opportunity to sell the portfolio with the prevailing level of risks (Figure 10A). The form of the efficient frontier is dependent on the covariance of the investments comprising the set. The rate of return was converted to US dollars. The variance and covariance around the geometric mean were computed for the common stock indices in the US and Atlantic Community Countries (Figure 10B).

Capital Budgeting

The prevalence of investments has led to several ideas particularly on the side showing benefits attributed to such activities. For Wall Street managers, it is important to determine the exact amount that will be gained from the investment. Essentially, there were several methods developed to address this need. The capital budgeting analysis model makes use of the discounted cash flow. This model enables investors to forecast the values of cash flow components. Among the models, this is considered widely used because of the perceived precision and usefulness in making short-term decisions.

The most prominent fund managers are usually part of Fortune 1000. These are the biggest firms in the world in terms of revenue and capitalization. Ryan (2002) focused on the Chief Financial Officers (CFOs) of Fortune 1000 firms to determine the value of capital budgeting. Based on the results, the annual capital budget of firms varies (Table 11A). Moreover, 99.5% of the firms stated that formal capital budgeting analysis is needed. The minimum capital expenditure of firms, however, differs in value (Table 11B).

Respondents of the survey were also inquired on their use of the budgeting techniques. Among the methods, the NPV is the most used. Almost half of the respondents stated their frequent use of NPV. In addition, the IRR is also highly used by these firms. At least 44.6% of the respondents are always using the budgeting method (Table 11C). Based on the results, NPV and IRR are the two prominent budgeting techniques. This observation appears to conform to the theories and practices of Wall Street managers.

Efficient Market Hypothesis

The efficient market hypothesis (EMH) is one of the most important concepts known to Wall Street managers. EMH assumes that the price of stocks in the market already reflects needed information about the stock. Hence predicting the price of a stock in the future is a futile exercise (Thaler, 1999). As shown in Figure 12A, some managers tend to predict a technical pattern in stock prices. Although such a process is a good start, several inconsistencies need to be determined before making such forecasts.

Thaler (1999) further examines behavioral finance in the capital markets. The study revolved around the idea of having two kinds of investors. Rational investors make decisions on economic fundamentals while quasi-rational investors venture into forecasts. Thaler further notes that quasi-rational managers think that some securities are undervalued. A catalyst will act soon and cause a bubble in the asset’s price. This behavior as illustrated by Thaler is an important element among fund managers. Such insight is highly useful when deciding to make high-return investments.

Using Figure 12B as an illustration, the excessive trading volume is fully explained. The figure suggests that trade volume is subject to change as manager opinions vary. It is interesting to notice that the increase in buyers and sellers created an upward shift in supply and demand. In analysis, however, the impact of price remains uncertain. The inclusion of other material information can reveal the effects on price. But there is a trend that will likely push the volume of trading upward.

Fundamental Analysis

The use of financial statements for analysis is a common method for Wall Street managers. Several managers have proven that such a method is useful in determining the value of stocks. A study conducted by Fairfield and Whisenant (2000) focuses on the capacity of analysts in the Center for Financial Research and Analysis (CFRA). CFRA analysts have claimed that their recommendations are based on publicly available information. Some fund managers use the analysis of CFRA to make their investment decisions.

The method of the study made a comparison between the earnings pronounced by CFRA before and after the reports were published. Moreover, the study assessed the capacity of CFRA analysts to detect diminishing firm performance. This evaluation also includes returns on strategies of firms as included in CFRA reports from 1994 to 1997. In general, CFRA analysts were able to forecast deteriorating company performance. This observation is attested by the deterioration of 300 basis points compared with control firms. CFRA analysts also used triggers to predict marginal returns.

Figure 13A revealed the abnormal gains attached to CFRA firms. These movements were observed 250 days before and after the reports were made. There were also hints of leakage of information that have allowed players to make the necessary adjustments. Using both parametric and non-parametric methods, it was found out that there were variations in the strategies of the 373 firms (Table 13B). In addition, there were also abnormal gains detected when using the CRSP value-weighted benchmark.

Technical Analysis

Trends and graphs are useful tools to determine movement in stock price. This notion is a primary guide for technical analysts. Technical analysis has a long history and has served as a witness to Wall Street’s ascendance (Neely, 1997). Figure 14A shows the most common illustration of technical analysis. Despite its critics, the technique has evolved immensely. Some Wall Street managers use the strategy to forecast price movements in stocks. There were success stories reported and some are still considered as coincidence.

Neely (1997) provided an analysis of using technical analysis in foreign exchange. Table 14A shows the results of technical analysis in short and long positions. The gains from the short position are negative of the gains to a long position. The return to a trading rule is equivalent to the aggregate daily gains, less transaction cost for the trades. The study also examined four moving averages and six filter rules. The table illustrates the yearly percentage gains, monthly SD, the number of trades in a year, and some ratios. Trade results appear to vary proving that the method is likely beneficial.

The use of technical analysis is important for Wall Street managers who incur high transaction costs. Aside from the costs, some risks are entrenched with the method. As shown in Figure 14B, the extra gains from both investments differ when viewed annually. The alarming observation is that the direction is headed negatively. Over some periods, the use of technical analysis can lead to losses. In the market, Wall Street managers can still gain with their long-term positions.

Active Management

Akey (2005) conducted a study that determines the advantage of active management over passive management. As stated in previous writings, some managers are known to be active performers. This study attempts to examine the difference between the two mentioned approaches. The study collected futures traders from 1991 to 2004 that are either passive or active. Based on the results, active traders have outperformed passive traders (Table 15A). This interpretation is risk-adjusted and with a noticeable lower drawdown.

Another method used by Akey (2005) was the segregation of data that were taken from 2001 to 2004. These periods cover all live trading for all available indexes. This was done to isolate the results taken from the previous years. It was identified that the eliminated data showed the most discrepancy in active and passive management. In the short run, active management still appears to provide higher returns (Table 15B). Risk-adjusted performance is considered as dominating result. The result has been consistent with what was obtained during the previous research process.

The final part of the comparison involves the correlation of monthly returns from both active portfolios and indexes. Table 15C illustrates that active management gains its returns without much correlation with the indexes. The results state that an increase in returns from actively managed investments will not necessarily translate to an increase in the indexes. Certain trends will lead to the desired conclusion. Active management allows investments to be positioned well and have more returns.

Conclusion

Based on the empirical evidence presented, Wall Street managers make use of various techniques to manage their investments. These methods are mostly theoretical in form and substance. The training and continuous learning have contributed for Wall Street managers to devise these mechanisms. Aside from these processes, other managers rely on experience to determine the path of their investments. Moreover, some of these managers believe that patterns and trends will allow a better understanding of the markets and eventually obtaining more gains.

There are several financial processes used by managers to determine the rate of return. Financial analysis and evaluation of financial statements are typical methods. Managers also make use of price movements to ascertain possible bubbles in stocks. It is expected that some managers value non-financial aspects to evaluate the values of securities. Although this method is strictly for experts, several managers venture into this strategy. Wall Street managers will consider all possible angles to make more money.

Most of the studies also reveal the different approaches that Wall Street managers have in making money. Some active managers constantly monitor changes in their investments. Passive managers are more concerned with indexed securities. Some managers are aggressive and are willing to make irrational decisions. Other managers seem to be conservative and are satisfied with a consistent flow of minimal returns. These are the managers that control most of the transactions on Wall Street.

Findings

Several notable results suggest how Wall Street managers make money. Some managers have gained a return on investment using the passive management method. The study of Malkiel (2003) asserts that managers have obtained returns by indexing their securities. On the other hand, the study of Akey (2005) maintains the value of active management. The results of the study showed positive returns in stocks that were constantly monitored by the Wall Street managers.

Wall Street managers rely on general concepts in making investments. For instance, managers believe that the market price of stocks already reflects all information available. Hence taking advantage of such information to make capital gains is an illogical strategy. This conservative perception is often seen in managers that rely on blue-chip stocks. Neely (1997), however, has noted that their evidence showing managers beating the market. Short-term gains from investments were observed among managers who studied trends in the market. These managers use technical analysis to determine the changes.

There are fund managers who consider financial analysis as a fundamental guide to money-making. The use of CAPM is prevalent among these Wall Street managers. The process allows managers to ascertain the exact returns of an investment. Aside from CAPM, Wall Street managers also use capital budgeting to determine investment viability. Among the methods, NPV and IRR are the most used. These methods provide insights to managers as to how much money investment can generate over some time.

Financial institutions are established to cater to the needs of Wall Street managers who have no time to conduct their analysis. The reports made by these groups are used by managers to make their decisions. The study of Fairfield and Whisenant (2000) investigated the efficacy of the Center for Financial and Research Analysis (CFRA). The results illustrate the capacity of CFRA to determine the deterioration of firm performance. In addition, there have been changes in the basis points of securities before and after the reports of CFRA were distributed.

There are also non-financial concepts being extensively used by Wall Street managers. The survey conducted by Hodgson, et al. (2000) revealed that managers use non-financial information to create investment structures. These structures often serve as a guide in the money-making processes implemented by Wall Street managers. Aside from this finding, building acquaintances tend to provide a boost to managers. The contribution of investors attached to the managers is vital.

Most Wall Street managers are versatile and flexible. This means that their interests are spread in all available investment vehicles. Managers maintain a structured portfolio to better oversee their investments. Results from the study of Cooper, et al. (2001) reveal that managers value the advantages of portfolio management. Wall Street managers ensure that their portfolios are exposed to growth securities. These include bonds, stocks, and other tradable assets. One notable option that is available to managers is derivatives. These products are possible sources of money.

Recommendations

The study opened several opportunities to conduct more in-depth researches on Wall Street manager money-making schemes. One interesting aspect that was not discussed in the paper concerned regulations. It will be interesting to find out how Wall Street managers perform in a market impeded by securities regulations. The results can be compared with Wall Street managers who operate in free markets. In this proposed study, the role of legislation is highlighted as a barrier to money-making.

Another possible study that can be done is a survey on which style Wall Street managers prefer. The method is similar to the presented research on portfolio management. The study will randomly select 500 Wall Street managers and asked for their money-making style. A questionnaire will also be provided for the respondents. The choices will be taken from the methods discussed earlier. The result of this suggested study will provide a numerical basis for the existence of mentioned strategies. In addition, it will serve as proof of how Wall Street managers operate.

It is also possible to ask some Wall Street managers the best approach when investing in a particular security. For instance, managers will be queried on their approaches when investing in stocks, bonds, and derivatives. The financial markets have several investment instruments to choose from. But the research needs to focus on the most prominent vehicles. The study is important because it is specific. It will also test the flexibility of Wall Street managers in terms of their money-making schemes.

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IvyPanda. (2021) 'Wall Street Managers: The Art of Making Money'. 22 August.

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IvyPanda. 2021. "Wall Street Managers: The Art of Making Money." August 22, 2021. https://ivypanda.com/essays/wall-street-managers-the-art-of-making-money/.

1. IvyPanda. "Wall Street Managers: The Art of Making Money." August 22, 2021. https://ivypanda.com/essays/wall-street-managers-the-art-of-making-money/.


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