5/12/10

What is the difference between Asset Management and a Hedge Fund? Would it be that in Asset Management you are creating different portfolios for different clients based on their needs, and in a Hedge Fund you are creating one portfolio that has every investors money pooled together?

Comments (34)

5/12/10

Asset management = hedge funds
Asset management = Private equity
Asset management = mutual funds
etc.....

I think you get the point, whenever you manage assets you are in asset management. Now if you want to get into differences between all those types of funds, well thats a whole other discussion.

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5/13/10

I had a feeling that was the case.. But why does this forum have separate forums for
each of those topics and also an asset management forum?

5/13/10
monkay:

I had a feeling that was the case.. But why does this forum have separate forums for
each of those topics and also an asset management forum?

Because asset management also covers private banking, PWM, mutual funds, ect. The asset management forum is probably there to be a catch-all in case someone has private banking questions or a question that does not fall under one of more specialized areas (i.e. PE).

"Greed, in all of its forms; greed for life, for money, for love, for knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA."

5/21/10

So, is Private Banking a range of services provided to high net-worth individuals, with asset management being an aspect of it?

5/23/10
5/23/10
5/23/10

Leverage. 'Nuff said...

5/23/10

leverage, time horizon, ability to select where in cap structure to invest, risk appetite, attention to a benchmark, nimbleness. I really think a lot of it comes down to time horizon. If you're at a big long-only pitching ideas into a $10B - $100B portfolio, it will take you several weeks to build up and blow out of positions, so you're really making investment decisions based on what can outperform over 2-5 years. at a hedge fund you're paying much more attention to short-term mispricings, e.g. making a call around a quarter relative to expectations etc. Since these funds tend to be much smaller, they can jump in one day and blow out three weeks later with a tidy profit. that just doesn't really work for most long only guys.

I'd be curious what the HF guys have to say on the benchmark issue. There's clearly a lot of attention paid to benchmarks at most MFs. Not that we're always buying exactly what's in them, but PMs are keenly aware when things are in or out of their benchmark, and in what weights. My guess is most HF guys care a lot less about that, partly because their "benchmarks" are poorly defined given leverage and l/s considerations.

5/23/10

jankynoname:

leverage, time horizon, ability to select where in cap structure to invest, risk appetite, attention to a benchmark, nimbleness. I really think a lot of it comes down to time horizon. If you're at a big long-only pitching ideas into a $10B - $100B portfolio, it will take you several weeks to build up and blow out of positions, so you're really making investment decisions based on what can outperform over 2-5 years. at a hedge fund you're paying much more attention to short-term mispricings, e.g. making a call around a quarter relative to expectations etc. Since these funds tend to be much smaller, they can jump in one day and blow out three weeks later with a tidy profit. that just doesn't really work for most long only guys.

I'd be curious what the HF guys have to say on the benchmark issue. There's clearly a lot of attention paid to benchmarks at most MFs. Not that we're always buying exactly what's in them, but PMs are keenly aware when things are in or out of their benchmark, and in what weights. My guess is most HF guys care a lot less about that, partly because their "benchmarks" are poorly defined given leverage and l/s considerations.


hmmm when you say "benchmark," do you mean like how in the Sharpe Ratio, the 3 month t-bill is the benchmark? I have heard hedge funds use Sortino ratios with semi-standard deviations, etc.
5/23/10

jankynoname:

leverage, time horizon, ability to select where in cap structure to invest, risk appetite, attention to a benchmark, nimbleness. I really think a lot of it comes down to time horizon. If you're at a big long-only pitching ideas into a $10B - $100B portfolio, it will take you several weeks to build up and blow out of positions, so you're really making investment decisions based on what can outperform over 2-5 years. at a hedge fund you're paying much more attention to short-term mispricings, e.g. making a call around a quarter relative to expectations etc. Since these funds tend to be much smaller, they can jump in one day and blow out three weeks later with a tidy profit. that just doesn't really work for most long only guys.

I think this might be over generalizing a bit. In large cap, liquid names this might be true of hedge funds but not in all cases. If I'm buying stock in a $400M market cap name even as a "nimble" hedge fund it's going to take time to establish that position. You're not getting in or out in a day and you presumably have a longer investment horizon. There is some selection bias in my sample because my interactions are mostly with value hedge funds but lots of hedge funds at least claim to have a long-term investment horizon(2-3+ years). Whether or not they actually hold investments that long is probably a different discussion.

5/23/10

That's correct... I have yet to encounter a hedge fund which actually uses a "benchmark" of any sort. I suppose there's a loose concept of "hurdle rate" which could be more appropriate, but it's a very loosely defined thing, if at all.

5/23/10

JohnBrohan:
thing likes which probablility distribution they model their returns on, the standard deviations and Sharpe ratios allowed, metrics used to gauge potential opportunities? Now that I have quant knowledge, I'd like a firmer definition.


JohnBrohan:
hmmm when you say "benchmark," do you mean like how in the Sharpe Ratio, the 3 month t-bill is the benchmark? I have heard hedge funds use Sortino ratios with semi-standard deviations, etc.

I'm going to go out on a limb and guess you just took your first ever capital markets/asset pricing class. It sounds like you just learned all these new terms and desperately want to apply them to the real world. The reality is, with the exception of a handful of purely quant funds, none of these are that important. No fundamental stock pitch will include, I'm buying this because it will improve my Sharpe ratio. Nor have I ever heard anybody talk about their Sortino ratio.

Janky's comment about benchmark is in reference to how you compare your returns. Does it make sense for a L/S hedge fund with investments in the US, Europe and Asia to be compared to the returns on the S&P500? Or if you have a mix of investments across the capital structure should you be compared to a blend of stock and bond returns? How much of the return do you ascribe to leverage? If you use options how exactly would you calculate your unlevered returns compared to the S&P or Russell 2000?

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5/23/10

Hedge funds' legal structure is different, with investors set up as Limited Partners. HF investors are required to be "accredited investors (with > $1M in investable assets) or "qualified purchasers" ( > $5 M investable). Asset managers may take on these investors, but also serve retail investors for who the SEC holds much more regulation.

Some HFs are risky, even highly speculative-- those are the ones you hear about in the news that either shoot the lights out (SAC, Tudor) or blow up (Amaranth, LTCM). Contrary to what the popular media would have you believe, though, most HFs' goal is actually to provide a steady return with low volatility.

About the Working at each, that's a good question, I'm interested too in the work/life of analysts or other positions at each.

5/23/10

It completely depends on the funds, most hedge funds have 4-10 investment guys so it completely depends on the founder/partners and their strategy. If they are running a low volatility strategy the day to day job will be exactly the same. A mutual fund and hedge fund are just the structures of the investment pools and tell you nothing about risk and volatility .Due to lower fees mutual funds tend to be larger organizations and therefore on average I would think tend to have more structure (investment committees vs. hallway discussion to put a trade on). If you need structure in your life a mutual fund may be better than a 5 person hedge fund because structure will be non-existent and everything will depend on your ability to generate trade ideas from start to implementation.

5/23/10
Beretta:

Asset Management vs hedge fund - what's the difference? If you're a portfolio manager at BlackRock vs a fund manager at Bridgewater (or something like that), how are you different?

Asset or investment management = superset
Hedge funds= subset

Generally, what you are thinking of with traditional asset management is mutual funds and separate account managers. They need to abide by the guidelines of the Investment Company Act of 1940 ('40 Act funds), which limit the types of securities, diversification rules, how performance can be presented, and things of that nature. Generally, you are looking at stock, bond, and money market funds. Firms also run separate accounts where they take discretion over an account and buy the securities in that account for you (basically for institutions).

Hedge funds are usually private Limited Partnerships which are much less regulated. They can basically do whatever they want. So, you can use leverage, go short, be highly concentrated, invest in illiquid assets, etc. The most common are long/short equity funds. Others are everything from merger arb, distressed debt, global macro, volatility arb, convert arb, etc. The big difference is that performance fees are the norm here, so, the idea is that the managers should have a greater incentive for strong performance, instead of just raising assets.

Do a quick Google search, you will find tons of info.

5/23/10

in addition to the above info, AM funds try to beat a benchmark such as the s&p 500 while a HF tries to maximize absolute return

5/23/10

Hedge funds are a subset of asset management. Everything else is too firm dependent to answer with any degree of reliability.

5/23/10
SirTradesaLot:

Hedge funds are a subset of asset management. Everything else is too firm dependent to answer with any degree of reliability.

Can you please elaborate with a few examples.

5/23/10

a lot more yelling at hedge funds

5/23/10
whatwhatwhat:

a lot more yelling at hedge funds

In all seriousness, I think this is the only difference.

I hate victims who respect their executioners

Best Response
5/23/10

Subset but culturally different, in large part due to the fee structure of both industries (allegedly) and the people involved (more likely) and the regulation that hamstrings AM at times.

To overgeneralize, at a large institutional top-tier AM house, there is going to be a lot more soft client work since performance fees are not allowed for certain types of clients whose money they chase. You'll notice the client side of the business is far more developed and they have to advertise new flavor-of-the-month products more and "research pieces" to give a glimpse of what's under the hood without saying a thing is important.

Because of fees, winning a lot of $1B mandates at anywhere from 10-50bps p.a. (sub-30 bps happens, the horror!) becomes the goal so the client side has to work harder. That, coupled with regulation, and the inability to lock-up capital for egregious periods of time or use gates unless you are realistically running a RE focused fund, and the possibility of inflows and outflows if you play the mutual fund game, makes investing in anything illiquid/esoteric rather difficult. Scalability is a huge concern if your strategy takes off; most HF strategies honestly stop working well after $5B, and $5B in traditional AM fee structure is a joke so those won't be pursued either. Strategies like: capital structure arbitrage, statistical arbitrage, distressed debt, event-driven stuff, or anything involving leverage in excess of 3:1 is generally not going to be seen. Asset-gathering at the biggest houses (unfortunately in my opinion) becomes part of management's focus because it's the only way they profit more.

Hedge funds have popularized the notion that only they know how to short things, even though being underweight something relative to a long-only benchmark is pretty much shorting it conceptually. What actually determines a lot of your short-side alpha if you aren't one of those guys running a hilarious 10-name concentrated portfolio with zero turnover is your prime broker killing you for fees or not; it is incredibly difficult to make an argument that some no-name $100MM POS equity l/s hedge fund will get better prime broker fees than some place like a BlackRock or Wellington running an equity l/s fund. You will see a few equity long/short guys at top-tier AM houses hidden away quietly, and these guys launch their own cayman funds for people who believe the manager can make real money.

The biggest joke ever invented was benching yourself to cash and charging a performance fee over it even if the return and risk profile of your fund does not match it at all in any conceivable notion. Thus it becomes very possible to have a 30 person outfit running $3B in a 2 and 20 structure; you will notice the headcount:AUM ratio across AM versus HF will be drastically different for this reason.

Additionally, HF features a lot of ex-prop traders, and certain styles have a lot of ex-banking guys. AM not so much. Accordingly, culture will be very different than a AM lifer where the setting is a little more snootily intellectual at times and more laid back. The pressure of living/dying by your PnL is reduced when you are clipping 20 bps on average off of a huge capital base as opposed to a 2 and 20 structure off of a puny capital base.

Hope this helped

5/23/10
syntheticshit:

Hope this helped

Well said.

5/23/10
syntheticshit:

those guys running a hilarious 10-name concentrated portfolio with zero turnover

why hilarious?

I hate victims who respect their executioners

5/23/10
BlackHat:
syntheticshit:

those guys running a hilarious 10-name concentrated portfolio with zero turnover

why hilarious?

Not knocking these guys BlackHat--it's just alien to me because the normal rules don't seem to apply. I understand the merits of investing in a small basket of companies that you feel like you have a true fundamental understanding of and feel are misvalued for whatever reason. It does eliminate a lot of the execution issues of larger funds.

However, it's very hard for a 10-name portfolio to not be significantly tilted towards a traditional factor or sector--to what extent are you making an actual fundamental call or an implicitly deeper bet? If you were forced to have more size, would you simply scale up your positions pro rata until liquidity becomes a concern? Or would you be forced to do more research on more names? How much of your returns are your thesis being correct or you just simply being stubborn and riding a deeper trend that has nothing to do with firm-specific risk?

If we distilled down your style to a set of rules that captured the return and risk profile of your strategy it in a systematic manner, would it still demonstrate outperformance?

It'd be really nice to be an Eddie Lampert or David Einhorn and to some extent your positions become partially self-fulfilling based on how the rest of the market reacts to you taking a position in a name.

5/23/10

Some AM funds can only invest in "safe" securities (e.g. investment grade bonds). HF don't have that limitation.

5/23/10

Synthetic Shit, Good Shit. Couldn't have said it better. As with both HF's and AM, Flows follow Performance; I would say this is more of the case with HF's (especially on a relative basis to AUM). There is more pressure in the air, generally, to perform because if you have a poor year(or blow up), you are done and are out of a job..

Fear is the greatest motivator. Motivation is what it takes to find profit.

5/23/10

From the investor's side of things, the differences lie in (and stem from) risk tolerance and required return. AM and HF cater to different appetites.

5/23/10

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