The role of asset management is to achieve a superior return on a client's investment. Asset managers provide a diverse portfolio, achieved by the pooling of funds, the use of research and investment skills to meet the client's goals. A hedge fund is a type of asset management. Compared to other types of asset management, such as a mutual fund, a hedge fund is loosely regulated and typically uses leveraging strategies to boost return on capital.
Absolute Vs. Relative Returns
Traditional asset managers define and manage risk relative to a market benchmark. The returns on their portfolios tend to mimic the status quo of the underlying market. Hedge fund managers define risk in absolute terms. They don’t heed market benchmarks but are driven by profit and loss, according to “The New Generation of Risk Management for Hedge Funds and Private Equity Investments,” by Lars Jaeger. The majority of hedge funds manage their portfolios according to a targeted volatility, or the market’s up-and-down movement.
Asset Classes Vs. Trading Stratagem
Asset managers are typically defined by their investments in particular classes of assets, such as Treasury bonds, small-cap growth stocks or large-cap equities. Their funds are exposed to the risks associated with their chosen location of assets. In contrast, the risk-and-return profiles of hedge funds relate to their trading strategies within an asset class, according to “Handbook of Alternative Investments,” by Mark Anson. They often use various styles of arbitrage and other strategies, such as short selling, to generate higher returns.
Management Vs. Incentive Fees
Mutual funds typically charge management, sales and marketing fees. Depending on the type of fund and the amount of money you invest, their management fees can range from 0.25 percent to several percentage points of managed assets, according to the “Hedge Fund Course,” by Stuart McCrary. Hedge funds can charge hefty incentive fees that can reach 20 percent or more of profits. However, they don’t charge commissions on sales.
Liquidity and Transparency
Hedge funds permit investors to enter and exit at specified times of the year and may place constraints on redemptions. Because a hedge fund’s success pivots on proprietary strategies, they won’t disclose their trading positions to the general public. They may inform a few material investors of details on trades. Other types of asset management vehicles typically accept or redeem an investor’s shares at any time. Mutual funds publish balance sheets and income statements. Aggregate assets are reported, shielding individual positions from public exposure.