LOS E requires us to:
describe aspects of the asset management industry
Buy-Side vs. Sell-Side
While talking about assets management or investment management, it is important to know the difference between the buy-side and the sell-side. These two sides complete the picture of financial markets.
BUY-Side
Buy-side is the side of the financial market that buys and invests large portions of securities for the purpose of money or fund management.
Sell-Side
Sell-side is the other side of the financial market, which deals with the creation, promotion, and selling of traded securities to the public.
Types of Asset Managers
Active vs. Passive Managers
a. These are two main management strategies to generate returns on investments.
b. Active portfolio management focuses on outperforming the market in comparison to a specific benchmark such as the Standard & Poor’s 500 Index.
c. Passive portfolio management, on the other hand, mimics the investment holdings of a particular index in order to achieve similar results.
d. active portfolio management usually involves more frequent trades than passive management.
e. Active managers form around 80% of the investment management industries.
f. A manager may opt for both an active and passive approach. Alternatively, they can also go for either of the two approaches.
g. Active management portfolios strive for superior returns but take greater risks and have larger fees.
Traditional vs. Alternative Asset Managers
a. Traditional investments include long-only position stocks, bonds, and cash. All the other investments are classified as an alternative investment.
b. Traditional management chooses from amongst the traditional investments to create a diversified portfolio for clients. Whereas, 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.
c. Traditional investment includes investment in: real estate, commodities, private equity, hedge funds, etc.
d. Alternative Investments includes investment in: derivatives, hedge funds, managed futures, art and antiques, etc.
e. Alternative investments generally provide good returns, but they are characterized by:
i. lower liquidity
ii. low regulations
iii. low transparency
iv. higher fee
v. different tax and legal considerations.
f. Off-lately the line of difference between traditional and alternative management has been blurred. A lot of traditional managers are making investments in alternative assets for the clients.
Ownership Structure
Mostly the assets managers are privately owned firms, but there are some publically traded asset management firms like banks and insurance companies.
Asset Management Industry Trends
Growth of Passive Management
Due to the increased efficiency of the financial markets, and the inability of asset managers to beat the market, there has been a growth of passive management.
Big-Data
a. Big data may be defined as extremely large data sets that may be analyzed computationally to reveal patterns, trends, and associations, especially relating to human behavior and interactions.
b. Off-lately the computer-generated programs and algorithms are faster and more efficient in processing and estimating earnings from the economic news. So many managers are making use of machine learning to evaluate the data and forecast returns.
c. Big data has proven to be better at generating alpha returns.
Robo-Advisors
a. Robo–advisors (roboadvisors, robo–advisers) are digital platforms that provide automated, algorithm-driven investment services with little to no human supervision. Robo–advisors most often automate and optimize passive indexing strategies that follow mean-variance optimization.
b. The main advantage of robo-advisor is:
i. There is a very low cost involved with the robo-advisor. The cost is as low as 0.2 % to 0.5 % annually.
ii. They are more accessible than human advisors. They are available 24/7 as long as there is the internet connection.
iii. This is a good option even for low net worth investors.
iv. Robo-advisors are an attractive option for young investors.
v. They provide a low barrier to entry to other firms, such as tech firms, to enter the lucrative asset-management industry.