Fund managers are the individuals, investment companies, or sometimes banks that handle a mutual fund’s investment decisions. These decision makers are charged with earning as much profit for their fund as they reasonably can while still following the risk parameters that the mutual fund discloses.
Fund managers are compensated differently than stock brokers who earn commissions. These managers receive their compensation based on the total dollar amounts under the management of the mutual fund. An advantage to this form of payment is that it provides motivation for fund managers to increase overall assets. A more successful manager will attract more investors and money and achieve greater returns. The management fee that the fund levies pays the fund manager. This fee appears on fund financials under the expense ratio.
A mutual fund’s board of directors hires the fund manager. Fund shareholders themselves select the board of directors. These fund managers wear many hats. They oversee all of the investments that the mutual fund undertakes. They must set and manage annual meetings. They must also be responsible for the mutual fund’s customer service efforts and many different elements of fund compliance. Compliance roles include offering a fund prospectus, negotiating commission rates with brokers, issuing proxies, and other important periodic and daily tasks.
Fund managers generally hire staff to help them with these many roles. Sometimes they contract out some or all of these services to another company. In practice most mutual funds are owned by families of mutual fund companies. In these cases, these companies provide their fund managers with these services at a cost.
A number of mutual funds have single managers in charge of the fund. The majority of larger funds have significant sized staffs that the fund manager leads. In such cases, these leadership positions are more like investment managers than fund managers. The biggest funds have a few fund managers who share the responsibilities and decisions. Entire investment firms act as fund managers to some mutual funds.
A fund manager is an important person to consider when investors are looking at mutual funds. One of the most important characteristics of a successful mutual fund concerns how long the fund manager has been present. Funds which boast a fund manager who has been with them a long time have a distinct advantage.
If a fund claims significant changes in its fund management, this is generally looked at as a negative factor. It might indicate that there have been problems in the fund with the performance. It could also imply that the fund manager has not properly carried out compliance and other critical issues in the daily running of the fund. Alternatively, a change in fund manager could simply mean that the fund has overhauled its investment strategy and changed its emphasis.
Hedge funds also employ fund managers. A hedge fund manager is far less restricted in the investments that he or she can pursue than is a mutual fund manager. This is because there is much less regulation for hedge funds than for mutual funds.
The hedge fund managers receive their income according to a different compensation scheme. Mutual fund managers earn their fees however the fund performs. Hedge fund managers instead are rewarded with a percentage of their earned returns. They also receive a small management fee that commonly runs between one and four percent of the fund’s net asset value.
Investors who do not like paying managers for poor performance appreciate this structure for paying hedge fund managers. The disadvantage to it concerns risk. Hedge fund managers could pursue more aggressive and risky strategies to make greater returns because of their fee structure.