Factors affecting international investment strategies’ choice of investment management firms exemplified by companies originated from the US

4) exchange-traded funds

5) hedge funds.

Investment banks, although they have a broader scope of operations than simply that of “investment management”, hypothetically they can also be counted in this categorization due to the fact that they tend to offer the services of investment management, asset management, wealth management and portfolio management.

These companies may work under different regulations and laws, they might have different legal structures, but the dynamics of their work in investment management is similar. They take their clients/investors money, they invest that money in financial securities, they distribute the profits they generate back to their clients and they charge their clients different sorts of commissions in doing so.

Nomenclature and common terminology might differ in various situations, but, in the literature and practice, it has been seen that terms “asset management”, “investment management”, and “portfolio management” are used interchangeably, whereas the term “wealth management” refers to a broader concept and scope of works, that incorporate “investment management” processes within itself. In terms of investment banks, they tend to have special divisions and/or subdivisions that operate in the investment management industry, just as they have special divisions for mergers and acquisitions, and sales & trading operations.

Open-end investment companies, or as they are called in the industry, mutual funds emerged in 1924 (Naik, 2007: 69). They operate in a way that they issue shares of their company and sell it to the investors who are willing to utilize the services of the company. Those particular shares are not publicly traded, they are merely ownership shares for investors, which can later on sell them back to the company to redeem.

Shares denote the monetary value of funds' and investment companies' investment portfolio. Shares experience capital appreciation or depreciation in the same manner as the financial assets or securities, the monetary value of which they symbolize. In other words, if the value of assets, which the investment company invests their own and their clients' money in appreciates in value; shares of the investment company that are sold to their investors will appreciate in value in the same fashion.

Conversely, if the financial securities in the investment portfolio of the company depreciates in monetary value, the value of shares that are issued by investment company to be sold to investors and clients will suffer from the same amount and proportion of capital depreciation.

In most cases, financial watchdog agencies and regulatory state organizations of states necessitate these companies to offer an investment prospectus to their clients and investors

Figure 1. Global assets under management in open-end funds by year

Source: Compiled by the author using the data from ICI Factbook 2018.

These introductory vouchers and informative documents delineate the investment company's “philosophy”, lay out the structure of the fund or the company, declare the structure of dividend structures, re-investment policies, potential restrictions and limitations for investors for pulling their money out of the fund, as well as management and performance fees for investors to pay to the investment company to be able to utilize their services. Prospectuses also look at the investment company's risks, associated with their markets and assets they invest in, and attributable to their styles, strategies and philosophy of the company. Prospectuses also outline the minimum amounts of money in terms of initial investment for investors to have a right to buy-in.

Some of the funds or investment companies may not be available for investors that are under the limit or threshold of a minimum initial investment. Investment companies are entitled to choose the category of customers that they are going to market and target their services to. Companies might choose to render and provide their services only to high net-worth individuals (HNWI) and multinational companies and other funds that have possession of at least a specific amount of money to invest in. That amount is also up to investment company to determine (Anderson, Born and Schnusenberg, 2010: 12-13).

Closed-end investment companies, although their way to operate in financial markets might have utmost resemblance to that of open-end investment companies; they differ from open-end investment companies in a way that they have a different manner of emerging initially and raising money from individual and institutional clients to invest in securities on their behalf.

Closed-end investment companies emerge in the same fashion as any company or business opening to the public to have their shares traded on a stock exchange platform. They tend to publish and display their prospectus beforehand, and then they open to the public through an initial public offering (IPO) process, they utilize the money raised in lump sum through this process of initial public offering, and they invest in this sum in financial securities.

Unit investment trusts are not a point of interest of this study, since they differ substantially from the traditional sense of “investment management” companies which is the principal focal point of this paper. Unit investment trusts do not tend to have board of directors, and they might not be investment management companies. Their main goal is to provide a fixed, dividend-like income to its investors for a limited time, and their portfolios tend to be limited without the principle of going concern. In other words, they are investment vehicles, planned to be liquidated and terminated at the end of their initial time frame. Hence, they will not be looked in detail in this study.

Exchange-traded funds, just like open-end and closed-end investment companies, are investment management companies, the shares or pieces of which can be bought and sold through financial intermediaries like brokerages and banks. They can be considered relatively newer and younger type of companies, since the initial origins of the concept was introduced and presented by Hakansson's study (1976), and the first actual ETF in the United States was introduced in 1993.

In the general terms, Anderson, Born and Schnusenberg (2010: 83) make mention of ETFs as: “Exchange-traded funds (ETFs) are index funds representing a basket of stocks that trade on a stock exchange throughout the day. ETFs are designed to correspond to a stock market or bond market index, a sector, a style, or a geographic region. This allows investors to capture the performance of an entire stock or bond index with only a single trade.”

This notion, especially the fact that individual and institutional investors could readily invest in one single asset that mirrors the growth and capital appreciation of many others, encouraged a lot of individual investors and multinational companies all around the world to invest in, thus, paving the way for and precipitating the development of this type of companies as well. ETFs offered convenience, easy diversification and tax efficiency, as in, instead of buying a multitude of assets with the expectation of attaining capital appreciation and return on investments and having to pay tax on different returns on different assets; investors and companies only pay a “single” tax for having invested in ETFs, since they incorporate many different financial securities in a single investment vehicle.

ETFs can also offer lower costs for investors, in terms of their annual management fees and performance fees, because they do not necessitate active management of the portfolios in them. The number and the proportion of the stocks in the exchange traded funds are initially set and fixed. Thus, investing in them is cheaper relative to the alternatives in the market.

There is little research pertaining to exchange trading funds, since their origins go back to 90s. But we can still provide and depict a picture from the industry. ETFs have been quite a popular choice the invest in due to the reasons we have enumerated and discussed above. Correlatively, the number of ETFs created by asset management firms and invested in by investors in global financial markets worldwide have also been on the rise. We can measure it by showing the money and assets invested in and managed by ETFs globally on a timescale. Based on the graph in the next table, it can be construed that money inflows into ETFs and the monetary value of the assets invested in ETFs globally have shown enormous growth since the beginning of 2000's.

Another major market participant and important entity in the industry of investment management are investment banks. They are, in essence, banks, that might work together with or separately from commercial banks and retail banks. Investment banks work as financial intermediaries and execute a broad range of underwritings and activities in the economy.

Figure 2. Global assets under management in exchange traded-funds by year

Source: Compiled by the author using the data from Bloomberg, Deutsche Bank, Statista, Thomson Reuters.

The legal definition of investment banks and their activities might differ from one financial jurisdiction to another. In the United States, for example, activities of investment banks are defined in the Glass-Stegall Act of 1933. They also got legally separated from commercial banks with this act. Hartmann-Wendels, Pfingsten and Weber (2010) describe, that investment banks' activities include loans and deposits, transactions, advisory provision in mergers and acquisitions, private equity and venture capital, structured finance, brokerage services, trading and sales in secondary markets for their clients and themselves, they define investment banking as: “all functions of a bank, which support trading at financial markets”.

Liaw (2012) takes up investment banks comprehensively. In his study, he explicates the structural parameters of investment banks and the ways they operate. According to his study, investment banks' client portfolios can incorporate entities and market participants from corporations and investors, as well as governments and central banks. The scope of engagements with their clients can include executions of mergers and acquisitions, divestitures of business units, execution of initial public offerings

As Schroder et al. (2011) lay out the differences between commercial/retail banks and investment banks. The differences also shed light on the reasons, pertaining to why investment banks can be considered in categorization of investment companies: According to their joint study, both commercial banks and investment banks are entitled to operate in the parameters of a financial intermediary, but the approaches do not necessarily have to be analogous with each other. The scope of being a financial intermediary in commercial banks is rather more straightforward but limited. It includes executing primary engagements such as giving out loans and taking in deposits. On the other side, investment banks operate in a way that they play a role as a financial enabler to its clients, investors and major corporations internationally. Along with providing all sorts of financial services to its clients as a financial advisor who furthers their trade operations in both primary and secondary financial markets globally, they also might take part in financial markets as market participants in their own favor, engaging in trading and investing just as they do in favor and on behalf of their clients.

It follows, that investment banks are major participants in both primary and secondary markets. In primary markets, where new financial securities are issued and publicized for market participants for the first time, investment banks play a substantial role in valuation of private companies for initial public offerings and all the processes within, including taking their shares to public, help customers carry out mergers and acquisitions, and other market making services for big corporate clients, operations of which require a great deal of liquidity. They also have divisions for proprietary trading, at which they follow particular strategies, complex mathematical models and high-end computational algorithms to locate opportunities in international financial markets for their trading and investing purposes and operations as a source of generating revenues. Chappe, Nell and Semmler (2012) define this, as: “Proprietary trading refers to the use of the firm's own capital to actively trade financial assets, as opposed to traditional investment banking fee-based activities, such as underwriting and consulting.”

These departments at investment banks might take different types of names, they could be named as the trading division, the proprietary trading desk, it could be in the sales and marketing department.

Stowell, (2013: 16) explains thoroughly what the main activities and duties of trading divisions at investment banks in general. According to his study, they mainly engage with institutional investors of the banks. Those clients of investment banks include international corporations, departments of governments pertaining to financial issues, and other types of funds in the investment management industry. Trading divisions at investment banks also executive proprietary trading activities, using banks' own money in financial assets on a broad spectrum including stocks, foreign currencies, fixed income instruments, derivative instruments. They also engage in market-making activities and act as a clearinghouse with their international clients, as in, they are entitled to act as a buyer or seller for their clients in very large positions that require additional and swift liquidity. Trading departments also provide research in all markets and financial investment products that banks offer to their clients and themselves to make investment-related decisions in international financial markets. In terms of investment banks' proprietary trading operations, Stowell (2013: 18) argues: “This “proprietary” investment activity is similar to the investment activities of hedge funds. Indeed, investment banks' proprietary investing activities have competed directly with hedge funds for investing and hedging opportunities worldwide.”

Chappe, Nell and Semmler (2012), scrutinize the place of investment banks in the financial culture of the United States. In their study, they put a close emphasis on the increasing tendency and proneness of investment banks' interest to carry out their proprietary trading operations more than they used to, more than their predisposition towards other operations they engage. Partly, it has been due to the fact, that the revenue from their proprietary trading operations has been on the rise with the increasing number of market participants over the course of several decades, in parallel with funds and other types of investment companies being more popular amongst individual and corporate investors and other types of clients, such as pension funds, union funds, college endowments, and so forth. Authors construe: “The trend for proprietary trading desks within investment banks to account for an ever-increasing share of profits, which has continued for thirty years, was in response to the increased competitiveness in the changing landscape.”

Lastly, for the sake of clarity and brevity in the following parts of this study, we should define the nomenclature, in a way that what is trying to be conveyed with the term “Investment banking firms”. This is because “banking” is one of the biggest and most major industries in the world of global finance. There are international, regional, national and even local banks that provide both retail services and investment services. In this study, the principal focus point will be the banks who provide the full set of investment services in international financial markets for international clients, whether or not they are individuals, corporations, or institutions. Investment banks also provide their clients with services such as M&A deals, raising capital, international major monetary transactions, intermediation, management of risk and/or financial positions. However, since the main focus area of this study is Investment and the management of Assets, Investments and Portfolios of investments, other areas will not be zeroed in on. Only the investment banks operating on an international scale will be selected and examined in this study.

Table 1

A classification of investment banks

Source: Taken from Stowell, 2013: 7.

But, even though in their own industry, investment banks were having a hard time keeping its high-level employees from shifting industries and fleeing into more profitable sectors in the vicinity. One of those types of firms, which operate in a way that is quite similar to investment banks' proprietary trading function, were hedge funds.

Hedge funds are businesses, founded as private limited partnerships. In other terms, they are private investment companies. Meaning, that not everyone in the financial markets can be clients of hedge funds. According to Stultz (2007), only institutional and individual investors, that provide the necessary conditions of the federal agency in the United States that oversees the regulation of financial markets can be clients of hedge funds. This is partly due to protect individual and institutional clients from the risky nature of the behaviors of hedge funds in international financial markets. In the broadest sense, they are in the same category as open-ended and close-ended investment companies, and investment banks that manage portfolios of their own and their individual and institutional clients and businesses internationally.

Nevertheless, relative to other types of companies in the industry, hedge funds are quite a bit more complex to define. The federal government agency, responsible for securities markets' proper functioning, oversight and regulation of financial markets and the participants of the market, namely the United States Securities and Exchange Commission (SEC) abstained from giving the term a conclusive definition by arguing: “Although financial service providers, regulators and the media commonly refer to “hedge funds,” the term has no precise legal or universally accepted definition. (Donaldson, 2003).

In the broadest sense, hedge funds are founded with the same intent as other investment management companies. That is to say that, all investment companies, in some way or other, are founded, and operate with the intention of generating returns for their clients, and receive fees from their clients for their advisory, intermediary, market-making, risk-taking and trading/investing services. By the same token, hedge funds also endeavor to generate positive returns. They also endeavor to obtain absolute returns, which are completely uncorrelated with the overall growth in the global economy, in other words, absolute returns do not depend on market's performance.

In global financial markets, hedge funds are known to act and operate by contrast with what their name suggests. Their operations and investment activities might not be completely correlated with the term “hedge”, as in, attempting to offset and counterbalance the potential downside of investment risk in a business, utilizing different types of financial instruments with methods of risk management in finance. On the contrary, hedge funds are known to wager risky investments, and to take highly speculative positions in global financial markets.

They, more often than not, use leveraged investments, in order words, they borrow and utilize those borrowed funds to increase the position size in a financial security in their portfolio, in an attempt to amplify their potential returns on the upside in an investment activity (Stowell, 2010: 200). However, financial leverage in investments also amplify the potential risk on the downside on the flipside, which, if not hedged, is known to be very problematic for investors. Financial regulators and watchdog organizations watch closely and restrict the use of leverage for many companies in financial markets, but hedge funds are not restricted in this area. They are not subject to restrictions and limitations in their investment activities. They are also not as transparent as other investment management companies in terms of their fiduciary duties to disclose their financial statements on a periodical basis. As with their flexibility with leverage, they can also participate in a broad range of investable securities and instruments, including over-the-counter financial derivatives, complex instruments, currencies, equities, fixed-income securities, government and treasury bonds of different countries and corporate bonds, even non-securities investments, distressed securities. They endeavor to locate and exploit different opportunities such as arbitrage from companies merging with and acquiring each other, potential mispricing in financial securities due to market inefficiencies in perception and information. They execute long and short positions without limitations, based on their comprehensive research.

Stultz (2007: 177) explain what arbitrage is in financial markets: “Arbitrage takes advantage of price discrepancies between securities without taking any risk. Most hedge funds attempt to find trades that are almost arbitrage opportunities - pricing mistakes in the markets that can produce low-risk profits. Once hedge funds have identified an asset that is mispriced, they devise hedges for their position, so that the fund will benefit from the correction of the mispricing but be affected by little else.” To further outline and enumerate the tools utilized by hedge funds in financial markets to scope out unique opportunities and to exploit them, along with investment strategies which will be discussed thoroughly further out in this study, another study should be examined at this stage. Frush (2008: 123-129) in his study, lays out an extensive list of tools used by hedge funds.

The list incorporates:

1) selling-short financial securities and using borrowed funds as leverage to magnify returns;

2) hedging out the downside risk of investment activities either by investing in negatively correlated financial securities that will balance out, should there be a capital depreciation in the main position due to a systematic risk component, or using counterbalancing financial derivatives in the same fashion;

3) using arbitrage techniques to carry out relatively less-risky investment activities;

4) using complex financial derivative securities to actively trade and invest;

5) concentrating on particular markets, geographies or regions to exploit the political and financial developments getting priced in with the release of economic data and the capital appreciation that comes with it; and finally,

6) using a multitude of different risk management tactics, not only to protect the downside risk on their investments, but also still to produce positively returns due to their investments positions' and activities' uncorrelated nature to the overall market and the systemic risk.

Fevurly (2013) in his book, expound on this assumption: “The term hedge in investments means essentially a minimization of investor risk by the taking of opposite long and short positions. Notwithstanding, many hedge funds historically and presently engage primarily in speculative activities, investing assets with more consideration given to the objective of winning a quick and sizeable profit than to the mitigation of investment risk. Whereas hedgers typically strive to avoid an exposure to adverse movements in the price of an asset, speculators take a position in the market and “bet” that the asset price will go either up or down.”

This flexibility and freedom, in which hedge funds are able to utilize their unregulated strategies freely in any country, gives them the opportunity to seek opportunities throughout global financial markets.

In some sense, it is plausible and safe to argue, that hedge funds owe some proportion of their rapid evolution and propagation partly to developments in the theoretical field and discovery of new financial products by scholars. Many of the complex financial products were not available even to high-profile and sophisticated participants in the market back in the periods when hedge funds were newly emerging. These financial products involve the trading of derivatives on public exchanges and in secondary markets with brokers and investment banks.

The first hedge fund is widely accepted to be founded in 1949. The main assumption in the first examples of hedge funds was to seek profits from investments in falling markets, as opposed to only in markets that are rising altogether in the periods of growth and economic boom. In the following decades, hedge funds managed to deliver higher and higher returns in relation to the overall market, as in, stock market indices like the S&P500, Dow Jones Industrial Average, NASDAQ indices, Russell indices in the US. Thus, the attention from the media, other financial intermediary companies and service providers, individual and institutional investors as potential clients and market clients had gradually increased over the course of multiple decades. Because of the fact that hedge funds were and are exempt from the strict regulations and fiduciary duties to be transparent with their books to the public, there has always been an obscurity and mystery with hedge funds in the market. They were entitled to release their performance in dollar-terms and percentage-terms if they wanted, but they were entitled to keep the details to themselves. It follows, that, they had aroused curiosity by overperforming other participants by a large margin for years, but not disclosing how they had done it. These factors helped the growth and spotlight over hedge funds for a long time. The growth of hedge funds can be illustrated in many ways. To name a few, the assets under management of hedge funds over the course of years could be looked at the see the rapid growth and extensity of hedge funds. The number of hedge funds and the number of investors investing and entrusting their money to management of hedge funds are also a palpable metric and measure in this sense. As it can be seen on the charts below, the number of hedge funds have shown steady growth starting from the beginning of 2000's and stabilized at the level of 10000's since 2012.

The monetary value of the assets that they manage on the other hand, have shown an even steeper growth since the second half of 1990's, but the graph depicts a more sensitive picture to comings of financial data on the macroeconomic level, which are not so relatively favorable as the times of growth. In other terms, the timeframe in around the years from 2007 to 2009 when there has been a decline and weakness in macroeconomic level financial data, the value of assets managed by hedge funds had dropped sharply.

Figure 3. Number of hedge funds worldwide

Source: Compiled by the author using Statista, Barclays Hedge, Eureka Hedge

Figure 4. Global assets under management by hedge funds by years

Source: Compiled by the author using BarclayHedge, LTD. Data

However, hedge funds are structurally different from open-ended and close-ended funds and investment management companies due to several reasons aforementioned and then some.

There are several distinguishing attributes and peculiarities that separate hedge funds from other types of investment management companies.

Hedge funds are not considered to be traditional investment companies, sometimes, they are categorized as either alternative investment companies, based on the ways that they operate. They are also highly concentrated in the United States, also, U.S. based hedge funds make up the majority of them operating globally. (Dixon, Clancy, Kumar, 2012:21)

The main and basic premise, that entwines itself around the literature on “traditional” side of the concept of investment management, as discussed in the first subchapter is, that investment companies' main goals are preserve the capital of their investors, and increase the value of their company/fund for their clients through capital appreciation of the particular assets that they invest capital in. They do that by trying to pick the right assets to invest large sums of money in, based on extensive research, that takes it source from an extensively broad variety and range of financial and macroeconomic data. (Sarkar, Dutta, Dutta, 2013). Those companies that belong to this side of investment management, operate within these parameters by trying to buy financial securities, hold them within their holdings and their portfolio for a specific time period, and then sell it for a profit through capital appreciation of those financial assets. Because they are somewhat restricted in the limits of their activities by the federal watchdog agencies and regulatory state organs in that particular jurisdiction for the sake of investors and clients of those companies. Traditional investment management companies are not allowed to take high-risk investment positions, to engage in short-selling and leverage exceeding a particular threshold. This way, the potential downside is attempted to be kept under control, volatility of markets and aggregate indices is attempted to be kept stable up to a certain degree, and the contagion risk is attempted to precluded from precipitating to have a spill-over affect into other areas of the market.

On the flipside, in the neighboring universe of alternative investments, unregistered investment pools, private limited partnerships that are exempt from regulatory oversight of financial watchdogs organizations. Meaning, that they can implement specific tools and investment strategies employing extraordinary levels of leverage and borrowings, short-selling, taking positions in highly illiquid markets, hedging and arbitraging with complex derivative instruments, creating layers of complexity in stratification in their investment positions.

Consequently, in many jurisdictions, because of their unusual nature, hedge funds are allowed to have limited number of investors/clients. In some cases, such as in the case of the United States, these limited number of clients must be accredited investors that are well-aware of the risks involved with the investments of hedge funds.

Another peculiarity about characteristics of hedge funds and the way they operate has been attracting more and more attention from both sides of the investment universe. This is termed as “hedge fund activism” and “activist intervention of companies”. Meaning, hedge funds acquiring shares of a company, crossing a sufficient percentage threshold, so that they have enough ownership stake in the business to be able to have an impact upon corporate decisions, however they like, based on their intention. Another way of this activist operations to manifest itself is publicly and explicitly short-selling big portions of a company, and blatantly disseminating information in a way that is hurtful to company. Incidents are recorded, in which, hedge funds attempt to impact and prompt other funds, investors, companies and shareholders of the company to drop the shares of that company, making the shares less attractive for investors, and to create a capital depreciation upon the company's shares.

Brav, Jiang and Kim (2015) remark, that hedge fund activism has been a “major force of corporate governance”, especially after 1990s. It would be plausible to say that, starting from 2000s, hedge funds started to move out of their traditional scope of operations. Which can be summarized as executing long-term investments and short-term trading operations on behalf of their customers in global financial markets to generate returns on investment, in a way that is unregulated, so that they can employ untraditional strategies and styles to amplify their returns, increasing their risk at the same time. However, in the earlier parts of 21^st century, they started to utilize their capital and power in a not-so-similar way. They began to demonstrate a different profile, where they advocate for changes for the better in top management and board of directors of publicly traded companies, especially in the United States. Brav, Jiant, Partnoy and Thomas (2008) lay out up to five purposes and intent as to why hedge funds get around to work on such schemes and parameters, and seven methods as to how they attempt to obtain their intentions. According to their study, hedge funds, in most cases, aim to carry out such operations because they would like to alter and optimize major components of businesses such as strategies, distribution in proportion of debt and equity and augment the value to shareholders of businesses. They tend to do it in a range of ways, which includes basic attempts to set up a regular communication line with the management of the company, to extremely hostile and adversary strategies including blatantly animadverting managements on public platforms and media, in an attempt to prompt them into implementing changes on the company's operations. Activist hedge funds may request solicit or claim a constant representation in steering the company's operational ways, as in, the board of directors. They also may even sue the company and tender takeover proposals of businesses, in rather extreme cases.

Another extensive study, focusing on the impacts of hedge funds, not only owning shares of publicly traded companies for short to long term trading and investing purposes in an attempt to make profits off of their stock shares, but also have an altering effect on corporate strategies and operations of the business is Wang and Zhao's (2015). In their study, the authors argue that the ownership of stakes of hedge funds in companies, big enough to have a decisive impact on corporate decisions benefits and bolsters up companies' several features in many aspects, ranging from the quality and quantity of patents, qualitative and quantitative parameters of research and development, and the outputs of innovation.

Although this characteristic of activism of hedge funds can be considered not hundred percent attributable to the concept of investment management, hedge funds are known to make quite positive returns and profits on their efforts of activism on a medium to long time horizon.

Structurally, hedge funds tend to be either onshore or offshore. Offshore funds are known to be founded in financial jurisdictions, in which the regulation in law and taxation is considered more flexible and less strict and rigid in relation to the traditional developed states. They also can be classified as their corporate structure, being public or private, or the tools and strategies they employ to locate opportunities, ascertain market risks, hedge their exposure to the markets, so on and so forth.

A comparison between hedge funds and other companies of investment structured by Wyman(2005: 5) can be seen in the table below.

Table 2

Comparison of hedge funds to other types of investment companies

Source: Taken from Wyman (2005: 5), in Apak, Taюзэyan, Sezgin and Lynch (2012: 547).

In this subchapter, we have defined the types of investment management companies and looked at the historical development of investment management companies, historical growth of the companies, and the current situation of them. We also have made a distinction between traditional types of investment management companies and hedge funds and compared some of their characteristics as to why hedge funds are organizationally and legally different from open end funds, closed end funds, investment banks, asset management companies and so forth. Now that we know what investment and investment management is, and what type of companies operate in these parameters; we are now going to find out and examine what sort of investment management strategies are there that are used by the companies we have just defined, what they mean, how they are constructed and under what sort of circumstances they are used.

1.3 Review of literature on strategies in investment management and the factors affecting the choice of investment strategies of investment management companies

In this subchapter, we proceed to defining what sort of strategies, the investment companies laid out earlier could employ, for the attainment of their objectives in financial markets.

There is an abundance in terms of studies, expounding on the concept of investment performance, which is the end result and outcome of the activity of investments throughout a specified time horizon, compared to or not compared to a similar, relative, or an opposite measurement. The compared measurement could be a percentage indicator, which could range broadly from past performance of the same type of company, fund, investment strategy, particular asset, or a benchmark as one of the aggregator stock market indexes, or financial results of an industry competitor, participating from the same or a different region, company, market.

Sokolowska (2016: 55) in her book, put together a relatively short, yet comprehensive definition of what investment strategies are and what they are comprised of, which can be quoted as: “Investment Strategies, narrowly speaking, encompass and describe the behaviors and decisional assumptions of the entities investing on the market. An investment strategy is a set of rules and patterns of behavior, through which an investor intends to pursue his/her orders of buying and selling on a given market”.

Different structures, markets and financial securities call for investment management firms to employ different strategies and styles in international financial markets.

Stowell (2013: 243) specifies the reason why strategies exist, and why they are employed by substantiating, that companies that deal with investing and trading activities in financial markets refer to these strategies to scope out and pinpoint occasions and opportunities that are unique and might result in profiting, if traded actively on the buy or the sell side, with the objective to come to a condition of positive returns, that are not correlated to the overall destination of aggregate market indexes in terms of value, percentage return and direction. These strategies or use of the strategies might differ from type of the investment company to another type.

There are different propositions as to how the investment strategies should be grouped and categorized. A meticulous approach should be taken in review of literature in categorizing and classifying the main strategies in investment to have a deeper understanding, as to why they exist and why they are chosen to be deployed in specific situations.

In their study, where they examine alternative investment management companies outside the United States, Ben Khelifa and Hmaied (2014), provides comprehensive definitions to strategies especially utilized by hedge funds in Europe. They preferred to break the strategies down into two main parts, directional and non-directional strategies.

The directional category consists of strategies that aim to take advantage from positioning the investments in the same direction as the market movements and trends. The main goal is fairly straightforward, which is to invest in situations where the expected returns are higher than the risk level, so that having an exposure to the market is a worthwhile effort. This category includes;

1) the equity long/short strategy, which is basically betting on company stocks that are considered as undervalued and expected to appreciate in value, and betting against company stocks that are considered as overvalued and expected to depreciate in value, in a stock market;

2) the global macro strategy, the aim of which is essentially to periodically monitor the macroeconomic trends, and alterations in the views or policies of governmental economic agencies, such as central banks in order to predict the moves beforehand and betting on the result of the variations to generate profits;

3) CTA/Managed futures approach to mainly operate in derivatives market, such as future contracts according either to intuitions of the investment manager, or the quantitative processes.

The second category is non-directional investment strategies, the forecasts and premises of which are unrelated to the status of overall global economy, or national economies and macroeconomic trends. Main aim is to benefit from discrepancies and inefficiencies of the market in pricing of financial securities and assets. In an attempt to reduce the market risk and protect the downside of investments, usually both long and short positions are taken proportionally. This category includes the event driven strategy; which monitors the change of governance, organizational structure and ownership status of companies to exploit. There are two sub-strategies in the event driven strategy, which are the distressed debt and arbitrage strategy. They track and invest in situations where there is a company that is near bankruptcy or reorganization, or a company that is about to merge, acquire or be acquired by another, respectively.

Stowell (2013), specifies profound classification types of strategies of investment, utilized mainly by hedge funds. Those accorporate macro strategies, event-driven strategies, equity-based strategies, and arbitrage strategies. They are just broad specifications that incorporate more narrow subcategories in themselves.

Table 3

An example of classification of investment strategies, no.1

Sources: McKinsey Global Institute; Hedge Fund Research, Inc. David Stowell. Taken from Stowell (2013: 244).

Yadav and Mishra (2017), in their study, provide a deep examination into particular parts of the investment industry including growth and evolution of it. They also zero in on hedge funds in the industry and bring a voluminous classification into strategies used in the industry, radically by hedge funds.

Table 4

An example of the classification of investment strategies, no.2

Source: Compiled by Yadav and Mishra (2017) from Frush (2009).

The first category in the table 7 refers to exploiting arbitrages, and generating profits using trades of spread, in other words, buying one security, short-selling the other, in order to benefit from the price differences between government bonds, shares of companies and to reduce systematic risk from the overall market. It can be done with bonds and stocks in convertible bond arbitrage strategy; only with bonds as in fixed-income arbitrage, only with company equities as in equity market neutral.

The basic premise behind the logic of simultaneously short-selling a correlated and/or interrelated financial security while buying another, is that buying(going long) one with the view that prices will appreciate and rise, and selling(going short/short-selling/shorting) the correlated one in contemplation, that if a systematic risk hits the macroeconomic data or the status quo in the markets, and this risk affects the securities across the board in the same manner, the investment company will have a loss from the security they bought, but they will make a profit from the other because they had a short position, in the end, counterbalancing the positions and reducing the risk.

The second category in the table 7 describes the strategies that draw their strength from unique occurrences or events in the market, particular sets of movements, transactions in international companies, mergers, spin-offs, acquisitions, divestitures of business units, take-overs, forced- or intentional liquidations, restructuring, downsizing, bankruptcies, turnarounds, so on and so forth. Subcategories might concentrate on specific events, focus on investing into companies, securities of which are highly distressed because of possible bankruptcies or relatively weak fundamental financial data, so that the securities are sold on a discount. Other subcategories of these event-driven strategies might dictate the investment company to research and invest in situations, where international companies carry out amalgamation operations, M&A events, when they fall out of favor due to bad-publicity and criticizing. These strategies necessitate to scope out this type of events, concurrently, invest or trade on the buy or the sell side accordingly to profit from these events on a short- to medium-term time horizon.

The third type of strategies in the table 7 consists of tactical or directional strategies. They tend to be more broad-scanning and focus on more far-reaching macroeconomic trends and movement in global financial markets. Such as constantly monitoring the growth of overall global economy and invest in countries, which are growing more and faster relative to other countries in terms of their macroeconomic fundamentals, such as gross national product, balance of payments, exports, foreign direct investments, so they are looked at more favorably from international companies; hence, the international investors and investment companies.

The last category in the study of Yadav and Mishra (2017) are the hybrid ones. They do not necessarily belong to any specific category. Any sort of hybrid subcategories might be there, where they might be a combination or different type of strategies applied and implemented together to yield a better result or counterbalance their possible systematic and unsystematic risk on the downside. It might include investing in funds of different investment management companies, as a result of examination and reviewing their strategies and performance.

Fabozzi and Markowitz (2011) also allocate a part of their study to strategies, especially when they discuss different styles of hedge funds and the type of risk the styles subsume. According to their classification, especially in the universe of hedge funds, strategies and styles break down into four major branches.

Table 5

An example of the classification of investment strategies, no.3

Source: Fabozzi, and Markowitz (2011: 24).

The authors start laying out their categories with Market Directional strategies. Those strategies expose the investor or the market participant to market risk, or, in other words, systematic risk.

The components of the second category attempt to benefit from rare occurrences and changes in international companies' ownership status and organizational structures. These styles and strategies are exposed to idiosyncratic risks in companies situations, rather than overall broad market or systematic risk.