The Asset Management Industry

Buy-Side vs. Sell-Side

Asset managers are typically referred to as being on the buy-side. This simply means they buy the products of sell-side firms. Buy-side firms include asset managers, hedge funds, institutional investors, and retail investors. On the other hand, sell-side firms include investment and commercial banks, stockbrokers, and market makers.

Types of Asset Managers

Active vs. Passive Managers

Active managers represent around 80% of the asset management industry. Through fundamental and quantitative research, they attempt to outperform benchmarks, such as the S&P 500. On the contrary, passive management simply tries to replicate the returns of a market index.

Traditional vs. Alternative Asset Managers

Traditional management usually focuses on being long stocks and bonds to create diversified portfolios for their clients. In contrast, alternative management uses leverage, derivatives, long-short strategies, etc. to either outperform a predetermined index or to create a return that is uncorrelated to the market.

Lately, the line has blurred between traditional and alternative management. Many traditional managers have introduced higher-margin alternative products to clients.

Ownership Structure

Most asset managers are privately-owned firms. However, some publicly-traded asset management firms also do exist. These often offer services such as insurance and/or banking services.

Asset Management Industry Trends

Growth of Passive Management

Passive management is picking up steam in the asset management industry. The two key reasons for this are the low fees charged for passively-managed funds and the fact that active managers are having a hard time beating indexes in increasingly-efficient markets.

Big Data

Nowadays, algorithms are much faster at analyzing earnings and economic news than humans. This opens the door to short-term trading. In fact, many asset managers are now using machine-learning techniques to help process data.

In order to generate alpha, asset managers are trying to discover data with predictive potential faster than fellow market participants.

Robo-Advisors

In 2017, robo-advisers managed an estimated US 180 billion in assets. The main advantage of robo-advisors are that:

  • They seem to attract a younger crowd of investors;
  • They charge lower fees because of the scalability of the technology;
  • They provide low-barrier to entry to other firms, such as tech firms, to enter the lucrative asset-management industry.

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