What Is a Fund Manager and What Do They Do?
Explore the crucial function of a fund manager in guiding investments and navigating market complexities.
A fund manager is a financial professional or a team responsible for implementing an investment strategy and overseeing the trading activities of a fund. They manage collective investment schemes, such as mutual funds or pension funds, on behalf of many investors. Their role involves a deep understanding of financial markets and economic trends to align investment choices with the fund’s objectives.
The Role of a Fund Manager
A fund manager’s daily activities involve continuous market monitoring and investment evaluation. They conduct in-depth research and analysis of economic data, industry trends, and company news to inform investment decisions. This research forms the basis for buying, selling, or holding securities within the fund’s portfolio.
Fund managers construct and manage diversified portfolios, strategically allocating assets to balance risk and potential returns. They actively manage holdings, adjusting positions as market conditions change, and monitor performance to optimize returns.
A primary obligation for fund managers is their fiduciary duty, legally binding them to act in clients’ best interests. This duty includes exercising reasonable care, skill, and caution in managing investments, avoiding conflicts of interest, and disclosing all conflicts and material facts.
Types of Fund Managers and Funds
Fund managers specialize in overseeing various investment vehicles. Mutual fund managers handle pooled money from investors, investing in diversified portfolios of stocks, bonds, or other securities. These funds are highly regulated under laws like the Investment Company Act of 1940, which mandates disclosure and operational standards.
Hedge fund managers manage private portfolios for accredited investors, employing sophisticated strategies like short selling, leverage, and derivatives. They aim for absolute returns regardless of market conditions. Hedge funds have less restrictive regulations than mutual funds and often require a significant minimum investment, sometimes with lock-in periods.
Private equity fund managers invest in privately held companies. Their investment horizon is longer, spanning several years, as they actively manage and improve portfolio companies to create value. Exchange-Traded Funds (ETFs) track an underlying index or asset class, trading on stock exchanges throughout the day, similar to individual stocks.
How Fund Managers Operate
The operational workflow of a fund manager involves a systematic approach to investment management. This begins with in-depth research, encompassing macroeconomic analysis, industry-specific studies, and detailed evaluations of individual companies. This research informs investment decision-making, including security selection and determining position size.
Fund managers engage in ongoing portfolio management, rebalancing to maintain desired asset allocations and implementing risk management strategies. They also perform performance attribution, analyzing what contributed to or detracted from returns. Communication with investors is continuous, providing updates on fund performance and responding to inquiries.
Fund managers are compensated through specific fee structures, most commonly a combination of management fees and performance fees. Management fees are an annual percentage of the assets under management (AUM), typically 0.5% to 2%, charged regardless of performance. Performance fees, also known as incentive fees, are a percentage of investment gains. A common model, especially in hedge funds and private equity, is the “2 and 20” structure, combining a 2% management fee with a 20% performance fee on net investment profits.