Asset Management
Asset managers invest money for clients through mutual funds, ETFs, pensions and separate accounts. Learn the main types, how they earn fees and how they invest.
Asset management is the business of investing money on behalf of others: individuals saving for retirement, pension funds, insurers, endowments, governments and companies. Asset managers pool and invest that money through mutual funds, ETFs, separately managed accounts and private funds, and charge fees for doing so. The industry is enormous, and its biggest firms manage trillions of dollars each. Asset managers are the core of the buy side, and their trading decisions move markets every day.
Main types of asset managers#
| Type | Typical products | Clients |
|---|---|---|
| Traditional asset managers | Mutual funds, ETFs, separate accounts | Retail and institutional |
| Index and ETF providers | Passive index funds and ETFs | Everyone. See What Is an ETF? |
| Hedge funds | Private funds with flexible strategies | Wealthy and institutional. See Hedge Funds |
| Private equity and credit | Private company buyouts, private loans | Institutional |
| Wealth managers | Advice and portfolio management for individuals | Wealthy individuals |
| Pension and sovereign funds (asset owners) | Manage their own money or hire managers | Their beneficiaries |
The largest firm, BlackRock, has reported assets under management of more than $10 trillion in recent years, and the largest index providers have grown rapidly with the shift to passive investing. See Active vs Passive Investing.
How asset managers earn money#
| Fee | Typical form |
|---|---|
| Management fee | A percentage of assets, from very low for index funds to over 1% for some active funds |
| Performance fee | A share of gains, mainly in hedge funds and private funds |
| Expense ratio | The annual total cost of a fund, shown as a percentage |
| Loads and distribution fees | Sales charges on some mutual funds |
Because fees are tied to assets, the business grows with markets and client inflows. Competition from low cost index funds has pushed average fees down for years.
The investment process#
- Research: analysts study companies, sectors and economies. See Valuation Basics.
- Portfolio construction: portfolio managers decide holdings and weights. See Portfolio Construction.
- Risk management: independent teams monitor exposures and limits. See Risk, Position, Loss and Drawdown Limits.
- Trading: buy side traders execute orders, often with algorithms. See Execution and Sales Trader.
- Operations: settlement, accounting and reporting. See Fund Accounting and NAV.
- Client service and distribution: reporting and raising assets. See Investor Reporting.
Fiduciary duty and regulation#
Asset managers usually owe a fiduciary duty to act in their clients' best interests. In the US, funds are regulated under the Investment Company Act of 1940 and managers under the Investment Advisers Act of 1940, both overseen by the SEC. In the EU, UCITS rules govern most retail funds. See Trading Regulators: SEC, CFTC, FINRA and NFA.
How asset managers move markets#
| Activity | Market effect |
|---|---|
| Index fund flows | Buying and selling index members, especially around rebalances. See Index Rebalancing |
| Large active trades | Price impact, often spread over days. See Market Impact |
| Quarter end rebalancing | Flows between stocks and bonds. See Rebalancing |
| Proxy voting | Influence on company governance |
Frequently asked questions#
What is asset management?#
The professional management of investments on behalf of clients through funds, ETFs and managed accounts, in return for fees.
How do asset managers make money?#
Mainly through management fees charged as a percentage of assets, plus performance fees in some funds.
What is the difference between an asset manager and a hedge fund?#
Hedge funds are a type of asset manager, but they use more flexible strategies, serve wealthier investors and charge performance fees; traditional managers mostly run regulated public funds.
Next, learn who sits on each side of the market in Buy Side vs Sell Side.
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Mentioned in
- Fund Accounting and NAVThe Trading Industry