How Can Tokenization Change an Asset Management Business?
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What are Asset Management Businesses?
Asset management businesses are companies that invest their clients’ pooled capital into securities according to an internally-developed financial mandate or objective. They usually invest their clients’ funds into different investment options such as real estate, bonds, stocks, master limited partnerships, and private equities, among others. The argument is that individual investors have limited access to resources and diversified investment options compared to asset management companies. Therefore, these companies help investors pool their assets together providing access to a more extensive set of securities with an individually smaller amount of investment.
How They Work
Asset management businesses assist their clients to invest their hard-earned cash. They take their investor capital and place it to work in different investments options. Based on in-house research and data analytics, asset management businesses make timely investment decisions on behalf of their clients. They make smart purchasing decisions aimed at increasing the total value of their clients’ funds. Their main goal is growing their client’s finances and portfolios.
However, it should be noted that they exclusively do this based on their client’s expectations, preferences, risks, and circumstances. For instance, one client may want to invest in the stock market as it can deliver high returns. Another client may want to invest in property which is ideal for long-term investments. Either way, these asset management companies must ensure that they meet their clients’ every need.
Asset management companies manage mutual funds, hedge funds, and pension plans. To provide these services, they usually charge a small service fee or a commission to their clients. The charges differ generally from one asset management business to another with differences usually occurring in transaction fees and commissions. Wealthy individuals typically experience higher service charges.
Hedge Funds and Mutual Funds
Hedge funds are alternative investment options made only available to wealthy or sophisticated investors such as institutions or individuals with a significant amount of assets. They are usually limited to wealthy individuals and institutional investors who can afford the higher fees and risks associated with hedge fund investing. Hedge funds are mostly known for using sophisticated techniques in investing in risky investments. Asset management companies strictly dealing with hedge funds usually invest in ‘derivatives.’ These are contracts to buy and sell a security at a certain specified price.
Mutual funds, on the other hand, are investments that pool several investors’ money into a pool specifically for purchasing shares of a collection of bonds, stocks, and other securities. This collection of shares is what is known as a portfolio which often-times is hard for an individual investor to re-create on their own. Mutual funds are overseen and operated by professional managers usually known as portfolio managers. Also, investors in mutual funds don’t own the securities in which their funds are used to buy. They only own shares in the total fund itself.
Portfolio managers are finance professionals responsible for investing clients’ assets, implementing an investment strategy, and managing day to day portfolio trading. Portfolio managers spend quite a considerable amount of time researching markets and events. Most are usually experienced traders, brokers, or investors who have strong backgrounds in finance management. Portfolio managers with excellent track records of sustained success are good to look for.
A portfolio manager has a great deal of influence on a fund no matter if the fund is a mutual fund, hedge fund, venture capital, or exchange-traded fund. They are usually in charge of making investment decisions on behalf of their clients based on their experience and success. They also hold meetings with investors, whether face to face, via phone calls, or online to explain their strategies and rationale behind their decisions.
Differences between Hedge Funds and Mutual Funds
- Mutual funds are registered with the U.S SEC and are subject to SEC regulations. Hedge funds, on the other hand, are not regulated by the SEC.
- Hedge funds can be used much more aggressively than mutual funds. They can be invested in a broader range of securities on a speculative position with the ability to short-sell stocks. It enables them to make money even when the markets are falling. Mutual funds are not permitted to take such risky stances and are regarded as safer than hedge funds.
- Hedge funds are not as heavily governed as mutual funds. Therefore, they have greater leeway to pursue investments and strategies that may increase the risk of investment losses.
- Hedge funds are reserved for wealthy investors with a significantly high net worth who can manage the high fees and risks associated with hedge funds. Mutual funds are relatively more straightforward to purchase with minimal amounts of cash.
- Hedge funds cannot be converted to cash as quickly as mutual funds which means that selling shares in a hedge fund is much more difficult.
Future of Mutual and Hedge Fund Asset Management
Tokenization is an integral part of blockchain technology that will undoubtedly revolutionize the asset management industry. It will allow for ownership rights to be transmitted and effectively traded on a digital platform. Through the use of equity tokens, the real-life value of assets can be ascribed to that of a token representing the asset. Asset information can then be provided on the blockchain which will be much more attractive to a wide range of investors.
Some of the benefits that tokenization can offer the asset management industry include increased security, increased speed, greater operational effectiveness, and reduced dependency on intermediaries while transacting. Tokenization will also provide both investors and portfolio managers the ability to divide assets into fractions. Portfolio managers will also have ease in proving their past successes in portfolio management as it will be permanently recorded on the blockchain.
Lastly, large institutions that have monopolized the asset management industry, and their insanely high fees can be disrupted. The blockchain platform will allow room for the introduction of trading bots that could significantly reduce unwarranted trading fees and unsustainable expenses. It could eventually lead to greater access to assets and reduced difficulty to obtain them.
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