There are many ways to become a successful investor, and asset management and hedge funds are two prominent options. There are undoubtedly some similarities between these investment styles. However, each service has its own nuances that can make it more or less suited for your personal financial situation. Before you make any final decisions on your finances, consider meeting with a fiduciary financial advisor to ensure you’re making the right choices.
What Is Asset Management?
Asset management takes a strategic approach in managing your assets within the confines of an investment portfolio strictly for the sake of strong returns. This is in contrast to a service like wealth management, which is much more goal-oriented. Asset management typically involves an advisor creating a cohesive asset allocation that matches your risk tolerance, time horizon and liquidity needs with the firm’s internal investment strategies.
Asset management portfolios include a purposefully chosen balance of both fixed income and “high-risk, high-reward” investments. Exchange-traded funds (ETFs), mutual funds, private equities, bonds and real estate are often favorite investment choices. The management aspect of these services come into play when the market shifts or your personal goals change. When this happens, advisors may rebalance your investments or alter your asset allocation strategy entirely.
High-net-worth individuals are the most common client of these services. This is because asset managers often charge significant fees based on a percentage of your assets under management (AUM), which can be difficult to afford for your average client. Similar to most advisory services, the more you invest, the lower your fees are likely to be.
What Is a Hedge Fund?
A hedge fund is a pooled investment vehicle that utilizes high-risk investment strategies in the hopes of garnering 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.
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’s a few examples:
|Hedge Fund Strategies|
|Long/Short||– Purchase undervalued stocks |
– Short sell overvalued stocks
|Global Macro||– Opportunistically sell and purchase investments related to national and international political and economic events |
– Maintain global diversification
|– Equities |
– Currencies and commodities
|Market-Neutral||– Invest in an equal amount of short stocks and long stocks in an effort to avoid risk||– Equities|
The tremendously strong return potential of these pooled vehicles, risky as they may be, are 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 in any capacity. In other words, prospective clients should take special precaution to ensure that they fully understand and feel comfortable with a fund’s managers and investment strategy before coughing up any cash.
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 let’s 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 an accredited investor 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?
The decision between working with an asset management firm or a hedge fund comes down to one consideration: how risky can you afford to be with your assets? If you find yourself nowhere near retirement age or flush with money, perhaps it’s worth seriously looking into specific hedge funds. That is, of course, as long as you meet SEC requirements. Not many investments can match the returns of a hedge fund, so take the time to do your due diligence.
For those who are hesitant to hand over their earnings to a hedge fund, accepting asset management services is a viable alternative. Asset management preaches reliable investing principles that are completely customizable to your needs. For some, this service is far preferable to the more impersonal approach of hedge funds, and understandably so.
Tips for Retirement Planning
- Retirement savings are nothing to mess around with. Financial advisors often have experience with financial planning, making them an ideal partner to build a retirement plan with. The SmartAsset financial advisor matching tool can help you get in touch with a fiduciary advisor that’s able to handle your personal needs.
- The best way to figure out what you need for retirement is to determine what your income requirements may be. Our retirement calculator can help you do this.
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