Asset Management vs. Hedge Funds

Asset management and hedge funds offer two distinct approaches for growing wealth, each with unique strategies and goals. Asset management focuses on managing a broad range of investments like stocks, bonds, and real estate to preserve and grow clients’ wealth over time, typically tailored to individual risk tolerance and financial goals. Hedge funds, on the other hand, are a specific type of asset that often employ high-risk, high-reward strategies such as short-selling, leverage and derivatives. Comparing asset management vs. hedge funds can help investors understand which approach aligns best with their financial objectives and risk preferences.

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What Is Asset Management?

Asset management is a service where financial experts oversee a client’s investments, aiming to build and protect wealth. These professionals work with diverse assets, including stocks, bonds, real estate, and alternative investments. Asset managers create tailored portfolios based on individual client goals, risk tolerance, and time horizons, making adjustments as market conditions evolve.

Asset managers often work with high-net-worth individuals, the mass affluent, institutions and pension funds. Their role includes rebalancing portfolios, identifying investment opportunities, and making strategic decisions to align with long-term financial objectives. Asset management firms usually charge fees based on a percentage of assets under management (AUM), which aligns their success with that of the client.

What Is a Hedge Fund?

A hedge fund is a pooled investment vehicle that utilizes high-risk investment strategies with a focus on outperforming market benchmarks and generating astronomical returns. Hedge funds are usually limited liability companies (LLCs) or limited partnerships (LPs), and they require the financial assistance of individuals. These are almost always extremely wealthy people, as the risky nature of these vehicles can be far too much to bear for lower-level investors. In fact, those who invest in hedge funds must qualify as accredited investors.

Hedge fund managers approach possible clients with a specific investment strategy that they believe will propel the fund to success. In an effort to separate themselves, hedge funds often profess to have a proprietary strategy. Contrary to this claim, most offer incarnations of the same philosophies. Here are a few examples:

Hedge Fund Strategies

Strategy	Objectives	Investment Types
Long/Short	– Purchase undervalued stocks – Short sell overvalued stocks	– Equities
Global Macro	– Opportunistically sell and purchase investments related to national and international political and economic events – Maintain global diversification	– Equities – Bonds – ETFs – Currencies and commodities – Options – Futures
Market-Neutral	– Invest in an equal amount of short stocks and long stocks in an effort to avoid the risk	– Equities

The tremendously strong return potential of these pooled vehicles, risky as they may be, is attractive. But this pull doesn’t come without its caveats, as hedge funds charge equally high rates. Their fee schedules ordinarily include two distinct charges: a management fee and an incentive fee.

Management fees are applied to the entirety of your assets under management (AUM), and they generally reside around a 2% annual rate. While this might seem tolerable, incentive fees can be much more significant at 10% to 20%. These are not necessarily consistent charges, though, as they are only added on if your portfolio generates profits. So if your portfolio sees a 10% return, and the incentive fee is 15%, you’ll receive an 8.5% net return.

The government agency responsible for overseeing the investment market in the U.S., the Securities and Exchange Commission (SEC), does not regulate hedge funds as tightly as other investments. Because they often have fewer regulatory restrictions, hedge funds can take on riskier investments and leverage advanced strategies like short selling, derivatives trading and arbitrage.

Finding Hedge Funds and Asset Managers

There are plenty of asset management firms around the country. Firms, and sometimes even each advisor within them, will have their own specific areas of expertise, making them better suited for certain client archetypes. The vast majority of these firms must file a Form ADV with the SEC. These all-important documents detail every aspect of a firm’s services, making them an invaluable tool for investors. If you don’t know where to start, the SEC’s official website features a tool that lets you search for registered investment advisors (RIAs) near you.

Because hedge funds are not under constant SEC supervision, they cannot advertise themselves to the general public. Therefore you’ll likely need to have some sort of relationship with one of the managers of a fund. Otherwise, clients need to be accredited investors to join forces with a hedge fund. SEC requirements state that accredited investors are individuals who meet at least one of the following stipulations:

Have an individual or joint net worth of no less than $1 million
Have either a $200,000 individual or $300,000 joint annual income over the last two years, with an expectation of earning the same in the future
Be a registered broker or investment advisor

Asset Management vs. Hedge Funds: Which Is Best for You?

Deciding between asset management and hedge funds involves assessing your goals, risk tolerance, and desired level of involvement. Here are key factors to consider:

Risk tolerance: Asset management generally appeals to those seeking steady, lower-risk growth, while hedge funds cater to high-risk, high-reward investors looking for substantial returns.
Financial goals: If your goals focus on long-term stability, asset management may be ideal, offering consistent growth and capital preservation. Hedge funds often suit those seeking aggressive growth and short-term gains.
Accessibility: Asset management services are widely available, often with lower minimums, while hedge funds typically require accredited investor status and higher minimum investments.
Fees: Asset managers charge a percentage of assets under management, which tends to be lower and more predictable. Hedge funds operate on a “two-and-twenty” model (2% of assets, 20% of profits), aligning with a performance-driven approach.
Involvement and transparency: Asset management often provides regular updates and collaborative oversight, while hedge funds may limit transparency, relying on the manager’s discretion and expertise.

Bottom Line

Asset management refers the professional oversight of managing a portfolio of investments. Asset management aims to build and protect wealth over time by generating strong returns and mitigating risk. A hedge fund, meanwhile, is a specific type of alternative investment only available to accredited investors. These pooled investment vehicles employ a variety of potentially high-risk strategies to generate high returns for their investors.

Tips for Financial Planning

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