In order to achieve the best possible returns in the financial markets and to tap into the expertise of professional money managers, investors can place money with an asset management company. It is the responsibility of the investment management team, primarily the portfolio manager, to prudently invest money on behalf of clients. This is done by combining the money or capital of multiple investors into pooled funds. As a result, investors gain exposure to more assets and regional diversity than would have been possible with a single investment.
A type of asset management company is a mutual fund. Mutual funds are investment portfolios that invest in securities based on a predetermined strategy outlined in a legal document, such as a prospectus in the United States. For instance, a mutual fund might invest only in stocks, also known as equities, but will invest in stock markets around the world. Another fund might be designed to invest only in certain sectors of the economy, such as energy or technology.
Often, the portfolio manager of a mutual fund will also balance a fund to various types of investments. A stock portfolio, for instance, might also have some exposure to fixed income investments, which include bonds. This is in an attempt to diversify risk for investors. For example, if one asset class, such as equities, goes through a period of lackluster performance, the returns or profits generated from another asset class, such as bonds, might remain stable to provide investors with a greater chance of rewards.
Another type of asset management company is a hedge fund. These firms inherently take on more risk than mutual fund companies, although they also offer the potential for greater profits. Typically, hedge funds are reserved for extremely wealthy individuals or family offices in addition to large institutional firms, including investment banks. Hedge funds are similar to mutual funds in that these portfolios contain pooled assets. The objective for a hedge fund portfolio manager, however, is to continually and aggressively outperform the broader financial markets. A mutual fund manager's goal is to steadily maintain and grow an investor's wealth.
Whether a mutual fund or a hedge fund, an asset management company typically charges investors layers of fees. Investors should become familiar with the fee structure of an asset management company before placing any money there so that there are no surprises. Fees for both types of investment firms typically are disclosed in legal documents to which investors have access or in the initial contract that is agreed upon between the firm and the investor at the start of a relationship.