A portfolio manager oversees clients' assets in a co-mingled fund that is pooled with capital from multiple investors. He is responsible for making investment decisions on behalf of the investors, and his value as a manager is measured based on the performance of the fund. The manager is paid fees for investing capital on behalf of investors.
Capital from both individual investors and institutional investors is overseen by the portfolio manager. There are various types of money managers, including hedge fund and mutual fund managers. Both require minimum investments in order for clients to gain access to a fund, and each takes on different levels of risk.
Hedge fund managers are often paid high fees to achieve returns that are uncorrelated to the broader financial markets for investors. They attempt to do this by taking on very high levels of risk at times. For instance, a hedge fund manager can bet on a stock's decline by shorting the security. By adding leverage to that trade, which is debt borrowed from a prime broker, a portfolio manager can bolster returns. If the trade goes south, however, the hedge fund manager must still repay the borrowed funds, which is where the risk sets in.
The fees charged by hedge fund manager are higher than mutual fund managers because of the risk that hedge funds take on and the returns they are paid to deliver. Typically, a hedge fund manager charges investors a 2% management fee and a 20% performance fee. If performance dips below the peak level of returns for a fund over a period of time, investors are not required to pay a performance fee until the portfolio manager reattains peak return levels in a fund.
Mutual fund managers are paid to preserve wealth for investors. They charge fees that are often outlined in a fund's prospectus or regulatory paperwork. These money managers typically do not short stocks as hedge fund managers do, but instead place bets that a stock price will increase. A mutual fund portfolio manager provides diversification to investors, and may invest in a broad range of asset classes, including stocks, bonds, and commodities, across multiple regions.
Many pension funds, endowments, and charities place large sums of money with outside portfolio managers. Wealthy individuals are most likely to invest in hedge funds because of the high minimums that are required to enter a fund, while mutual fund minimums are less cost-prohibitive. Certain mutual fund managers even accept funds from minors who are attempting to preserve and grow capital for future events, such as a college education.