Introduction
As a newbie investor, you must surely plan how to get started with an investment portfolio. Your 9-5 earnings can easily give way or expedite owing to the growing inflation we see in most growing economies of the world today. With the huge surge of investment options that stand in front of you, it gets harder to decide which investment option to choose and which ones are to be left out.
Do you want to hedge equities or bonds over changing interest rates or want to go the traditional route of finding yourself an Asset management portfolio say like mutual funds or have holistic cum customized investment solutions in place? Well, the latter can bring you more bountiful financial benefits than the former.
On this parlance, let us evaluate the key points of Difference Between Hedge Fund And Asset Management. Helping you get started further:
What Is a Hedge Fund- Meaning and Conceptualization Explained
A Hedge Fund is a private investment fund that pools money from private wealth management firms and wealthy individuals as such. The pooled funds from wealthy individuals and institutions get invested in a variety of investment options to gain higher returns on the investment portfolios as such.
The Hedge fund utilizes a variety of strategies to earn returns on the fund account. These strategies are as follows:
- Trading in the market through stocks, bonds, shares, or commodities
- Short selling (Here, you bet that the prices of stocks would go down)
- Indulge in leveraging (Here investment firms borrow more money from the general public to increase their subscriptions, and the money is utilized to invest more via derivatives, shares, and bonds)
- Involving arbitrage and other complex financial moves
The returns on investment the fund garners are further distributed amongst investors, shareholders, and other stakeholders as such.
What is Asset Management- Meaning and Conceptualization Explained
Asset Management entails a set of professional activities that encompass the management of clients’ stocks, investment portfolios, and derivatives. Companies, institutions, and independent investors look forward to approaching Asset Management firms to maintain their financial portfolios in a robust and systematic manner indeed.
The primary goal here is to work for clients to help them grow their portfolios over a period of time. They grow the clients’ money by taking into account their individual goals, preferences, and assessing the risk tolerances that every individual investor can take under his/her belt conveniently.
Asset Management, therefore, encompasses traditional methods of investing as compared to what hedge fund owners do. Here, asset management brings investment solutions to the conservative segment of investors like pensioners, retirees, and senior citizens who have corpus sums to invest in and accept modest rates of returns unless and until their portfolios are up for redemption. Here, the investors take home their capital investment and the accrued interest earnings the portfolios have accrued over a reasonable period of time.
Asset Management companies can also be referred to as ‘Wealth Management Firms’ that aim at curating independent and customized financial solutions for their clientele. These include retirement planning, estate planning, investment planning, tax planning, and a whole range of holistic and long-term investment solutions.
What are the core points of difference between a Hedge Fund and Asset Management?
These are the core points of difference between Hedge Fund and Asset Management. Helping you get covered here:
Investment Strategy Explained
Hedge Fund companies use highly aggressive strategies to garner investment returns across portfolios. These strategies include short-selling, betting, arbitrage, and leverage options on derivatives. The fund companies aim for absolute returns despite market conditions.
Whereas, asset management or wealth management firms aim for long-term growth of capital and wealth for their clients and investors. These firms collate funds and invest them in capital-safe bonds and equities so that the fund amounts of subscribers are utilized in a safe and secure manner.
The stocks and commodities bought via wealth or asset management firms usually use buy-and-hold options so that relative returns are obtained on a long-term basis via desired index-level benchmarks. These long-term investment strategies protect the principal amount of investors to a greater extent. Therefore, traditional mindset retail investors, retirees, pensioners, and senior citizens approach wealth management companies to manage their funds prudently and efficiently.
Clientele you have between both the domains
Hedge Funds are usually opted for by high-net-worth individuals or HNWIs, institutional investors, and highly accredited investors on the whole.
This is primarily because they own huge amounts of funds and can afford to play with their sums of money over aggressive trading strategies to bet for higher rates of returns over traditional investment options.
Whereas, with respect to Asset Management firms, their clientele usually comprises of senior citizens, pensioners, and retirees who may want to invest their money into safer havens of investment as it is their lifelong savings, and they do not want to lose their primary or principal investment money at any cost.
Regulatory Authorities that are involved
With respect to Hedge Fund Owned Firms or enterprises, they operate after getting several kinds of exemptions, say as Regulation D from the US Govt or Embessey. The KYC norms or other highly regulated nomenclatures are lightly operated or given a bypass to serve their clients on a first-come-first-served basis.
Whereas, with respect to Asset Management, the firms must be highly accredited by various regulatory authorities to guarantee the safety of investments for their clients and stakeholders. Therefore, the various norms under Regulation D from the US Government and Investment Authorities must be complied with by the candidature of these firms before they set up their stores across retail or online establishments.
In other words, these firms or companies must comply with diversification, disclosure, and liquidity rules to a greater extent indeed.
Level of liquidity across both domains
Hedge Funds have lock-in periods and minimum redemption windows. Here, the investors can withdraw their requisite amount of funds once every 3 months or once annually.
Whereas, with respect to Asset Management firms, you are allowed liquidity every day when you invest your funds via ETFs or mutual fund companies.
Fee structure that is involved
Hedge Funds charge 2% of your portfolio as a management fee. Then, you would be charged 20% based on the performance your portfolio achieves during the given frame of time. Therefore, Hedge funds follow the 2:20 model.
Whereas, with respect to Asset Management, the asset managers charge very minimal fees under the AuM method. Here, the net worth of worth under management is taken into account, and you may be charged anywhere between 2-5% on the AuM towards managing your portfolios for holistic investment solutions. Say, like Investment planning/ Estate Planning/ Tax Planning, and so on. Individual wealth practitioners can also charge their clients flat-slab fees or on an hourly basis.
Transparency is involved between the two domains
For Hedge Funds, there is a lower level of transparency or info-sharing that happens between the parties who are connected with a hedge fund agreement. Or, if you get into a contractual deal while applying for a hedge fund-related investment portfolio. The investors would therefore not be informed on strategies or the net worth of holdings very frequently.
Whereas, with Asset Management, things work quite differently here. The asset management firms deal with traditional methods of investing in long-term financial portfolios. Plus, these firms cater to traditional investors like pensioners, retirees, and senior citizens for whom their capital investments are their bread and butter. Therefore, the level of transparency an asset management firm shows to its clients is usually at an all-time high.
In other words, asset managers discuss holdings, performance, and other key metrics on investment portfolios with their clients on a very frequent basis indeed.
Risk Profiling between the two domains
In a Hedge Fund operation, the amount of risk that is involved is usually on the higher edge. This is mainly because the investment cap is put through aggressive trading strategies like ‘Put’ or ‘Call’ options, arbitrage, leveraging independent stocks, and other complex strategies. The returns are higher if the strategies click, else the investors must have the risk belt to tolerate market-related losses too.
Whereas, in an Asset Management domain, the risk that is prevalent to investors is at a lower edge indeed. This is because the principal protection of investors is the key paradigm that the asset management firms work with. Therefore, the investor’s primary capital is invested through careful analysis of capital safe bonds and shares in the market. The portfolios gain traction when held long-term and grow at a steady pace to compound capital amounts at the time these asset portfolios are up for redemption.
The Bottom Line
Hedge Funds and Asset Management are meant for two different sets of investors altogether. One must read the offer documents carefully before investing with any investment company. What are your thoughts on this? Do let us know in the comments below!
Frequently Asked Questions or FAQs
What is asset management vs a hedge fund?
Answer: Asset Management is a domain that encompasses a holistic range of financial principles that are aimed to protect the wealth of their investors from eroding or giving away to inflation whereas hedge fund managers help highly rich investors make better returns of investment over shorter span of time via aggressive financial strategies like betting, leveraging, shares arbitrage, applying ‘call’ or ‘put’ options on short-tenor commodities, etc. Therefore, asset management and hedge funds operate via two opposite vertices of the globe.
What is an asset class?
Answer: An asset class refers to a type of asset that fits into a financial basket or the wealth basket for investors. Market-indexed stocks, shares, bonds, derivatives, futures, commodities, and currencies are types of assets that can be inclusive of a diversified portfolio indeed. The risk management policies must be communicated by the asset manager to his clients prudently and diligently.
The Assets under management or AuM is calculated to figure out how much fees are you liable to pay to a Wealth management firm or an independant practitioner for taking care of your complex financial portfolios seamlessly.
Explain the degree of skepticism that is prevalent with the usage of hedge funds.
Answer: Hedge funds often charge heavy performance fees from their investors. This is because the hedge fund companies or many hedge operators need this amount to buy a higher number of shares, bonds, or derivatives that are put to the test via aggressive financial strategies. The hedge funds may receive higher gains or allow you to lose it all.
The hedge funds use investors’ capital to procure many hedge funds, and these hedge funds are known for their aggressive hedge fund strategies, that your fund amount might be put to. To invest in hedge funds, you must possess a greater degree of risk tolerance in volatile market conditions than investing with more capital-safe investment options like bonds or fixed-income securities.
