Asset Management Firm Vs Hedge Fund: How They Differ

Do you want to become a successful investor? Knowing the difference between asset management firm vs hedge fund can help you make the right investments.

As an investor in India seeking to achieve success, you can consider asset management firms and hedge funds as top options to achieve this goal.

However, many people are unaware of the differences between these investment styles.

Each service has its own distinct features that can make it more or less suitable for your personal financial situation.

But before you make any final investment decisions, consider meeting with an asset management firm under PMS India, like ITUS Capital, to ensure you’re making the right choices.

ITUS Capital is an independent full-service asset management firm. We use a PMS fund structure to manage money.

We’re committed to shared growth and are structured to focus on long-term growth.

In this post, we will educate you on the key features of asset management firm vs hedge fund.

Let’s get started.

Overview of Asset Management Firms

Asset management firms are responsible for managing funds for individuals and companies.

They grow their clients’ finances and portfolio by making appropriate investment decisions on their behalf.

And because they work with a group of investors, they can diversify their clients’ portfolios.

Due to this, they are open to options that offer more value, and their capital has a greater chance of appreciating while reducing risk.

These combined funds can be channeled into various assets, such as property, shares, bonds, or other investments, depending on the financial objectives of their clients.

For instance, you can achieve faster results by investing in the stock market, while investing in property is generally best suited for long-term asset management.

How Asset Management Companies Charge Fees

When you invest with an Asset Management Company (AMC), you usually pay them a fee based on the total value of your investments, also called Assets Under Management (AUM).

This fee is set as a yearly percentage but is billed monthly.

For example, if an AMC charges 1% a year and your portfolio is worth $10 million, the yearly fee comes to $100,000.

Since portfolio values change all the time, the fee you pay each month changes too.

If your portfolio grows to $12 million the following year, the AMC earns $120,000 instead of $100,000.

On the other hand, if the portfolio drops to $8 million because of market losses, the AMC earns only $80,000.

This setup links the AMC’s earnings to your results. If you gain, they gain. If you lose, they make less.

It creates a shared interest between you and the AMC.

Most AMCs also set a minimum annual fee, often around $5,000 to $10,000.

Because of this, they usually work with clients who have larger portfolios, usually like $500,000 or more.

Some specialized AMCs, like hedge funds, charge extra fees called performance fees. (We’ll talk about the hedge fund next)

These are earned when they deliver returns above a certain target or beat a market target.

A common model in hedge funds is called “two and twenty.” This means a 2% annual management fee plus 20% of the profits made.

So, basically, AMC fees can go up or down depending on how the portfolio performs, aligning their success with yours.

What Is a Hedge Fund?

A hedge fund is a private investment fund that isn’t registered with regulators.

These funds collect money from investors and put it into stocks, bonds, or other assets with the goal of making profits.

Hedge funds are usually open only to wealthy individuals or large institutions that meet certain financial requirements.

Unlike mutual funds or exchange-traded funds (ETFs), hedge funds have more freedom in how they invest.

This flexibility allows them to try unique strategies, but it also comes with higher risks of losing money.

Another big difference is that hedge funds are not meant for everyday retail investors.

They don’t follow the same strict rules that protect mutual fund and ETF investors.

For example, mutual funds must let investors cash out daily at the fund’s net asset value (NAV).

They also face rules to avoid conflicts of interest, ensure fair pricing, control borrowing, and provide regular disclosures.

Hedge funds are not bound by these safeguards.

Hedge Fund Cost

Hedge funds have higher fees compared to asset management. Sometimes, their investments come with higher risks, but clients are willing to bear them.

The hedge fund managers have a two-component fee based on that high risk.

As mentioned, asset managers charge a management fee of 1.5% and 2%. Hedge fund incentive structure includes a performance fee.

All types of hedge funds charge this fee, and it is an incentive bonus for bringing extra returns.

The performance fee is the reason for the huge wealth of many hedge fund managers.

How Hedge Funds Work

Hedge funds bring together money from investors with the goal of earning returns higher than the overall market.

To reduce risks, the manager often protects the fund’s positions.

This means they invest part of the money in assets that usually move in the opposite direction from the main investments.

If the main investments lose value, the hedge may gain value, helping to balance things out.

For example, if a hedge fund invests heavily in the travel industry, which rises and falls with the economy, it might also put money into the energy sector.

If travel stocks drop during an economic slowdown, energy stocks may hold steady or even rise, helping to cover some of the losses.

Hedge funds are known for using complex and risky strategies. They often borrow money, use leverage, and trade in derivatives like options and futures.

Because of these risks, only accredited investors can typically join.

Accredited investors are people or institutions that meet certain wealth or income requirements, such as pension funds, insurance companies, or high-net-worth individuals.

Hedge fund investments are not easily withdrawn.

Most require investors to keep their money locked in for at least a year, and withdrawals may only be allowed every few months.

Conclusion

So, you now have an understanding of asset management firm vs hedge fund.

As discussed, these are two financial strategies we use to manage assets on behalf of investors.

But there are some key differences between the two.

The goal of asset management focuses on growing wealth gradually while keeping risks low, while hedge funds pursue higher returns no matter how the market is performing.

At ITUS Capital, our fee structure is transparent and linked to performance with emphasis on investor returns.

If you’re in need of a company that compounds capital over the long term, contact us today.