When affluent or small investors have money to invest, they typically will engage a fund manager to facilitate the process. A fund company represents an investment management firm, such as a mutual fund company or another manager of assets, that invests money on behalf of its clients. These clients could be small investors or wealthy individuals, or they could be large institutions such as banks, pension funds or corporations, among others. The goals of the investor will determine which type of fund company is used.
All fund companies are in the business of portfolio management, but there are many different types of fund management. Some fund companies are dedicated to a specific asset class, such as equities or hedge fund investing, and others might be devoted to a specific region, such as Asia Pacific investments. A fund company might be so niche-oriented that it invests only in a specific sector, such as technology or energy securities.
One thing that fund companies have in common is that they charge investors fees for their services. In a mutual fund company, there might be several layers of fees, depending on the amount that a client invests and the type of investment management that is involved. Often, mutual fund fees are accused of being hidden and come as a surprise to investors, although they are outlined in a mutual fund company’s prospectus, a public filing that is submitted to a regulatory body. A hedge fund company has a two-pronged fee structure: one layer for performance and another for investment management. If a hedge fund is underperforming based on previous investment returns, however, the performance fees can be waived.
In addition to the different types of fund companies, there also are many kinds of investors. An individual who has limited money to invest might choose to invest with a mutual fund company in order to take advantage of the professional investor expertise. Plan sponsors, who invest capital on behalf of pension funds, have some of the largest investments in the world. This class of investors might choose to invest in mutual funds, in hedge funds or in separately managed accounts (SMAs).
An SMA is a fund designed for one investor and does not contain money from other investors, unlike a traditional mutual fund. The SMA portfolio is designed with similar securities to other portfolios that a fund company manages, however. A fund company will often require a minimum investment into one of its commingled funds, but that minimum amount will often become more flexible for an SMA investment.