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Asset Management vs. Hedge Funds


Asset management is typically offered by financial advisors and professional investment firms. This usually involves creating a strategically built asset allocation for your portfolio, leaving the individual investment decisions more up to your advisor. On the other hand, hedge funds are their own standalone investments that investors can access through investing directly in them. Hedge funds are also professionally managed, but their portfolios are generally chasing the highest returns, meaning they can be on the riskier side.

Do you have questions about investing or professional portfolio management? Speak with a financial advisor today.

What Is Asset Management?

Asset management takes a strategic approach to manage 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 comes 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?

Asset Management vs. Hedge Funds

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 are a few examples:

Hedge Fund Strategies

StrategyObjectivesInvestment 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 in any capacity. In other words, prospective clients should take special precautions 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 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?

Asset Management vs. Hedge Funds

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.

Bottom Line

Asset management is the active oversight of managing a portfolio of investments. The only goal for asset management is to provide strong returns for the portfolio of assets as a whole. A hedge fund, while similar, is a collection of investment oversight that seeks greater returns through very risky types of investments. Your appetite for risk will typically help you determine if either choice is right for you.

Tips for Financial Planning

  • Planning out your finances for the future can be difficult to do on your own. However, a financial advisor can help with this. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • 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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