According to Wikipedia, a portfolio manager can be defined as “either a person who makes investment decisions using money other people have placed under his or her control or a person who manages a financial institution's asset and liability”. Most people sometimes mistake a portfolio manager for a fund manager. Both jobs are very much alike, but while a fund manager manages funds, a portfolio manager manages assets; which could be stocks, money, bonds and other valuables. As a Fund manager, you would be making trading decisions with other people’s money. The job of a Fund manager reminds me a lot about the Social trading contest. In the contest, a candidate is given a Demo account with 100,000USD, and is expected to subscribe to at least 10 signal providers for trades to be taken on the account. These trades are copied from the signal providers, and at the end of the contest month the candidates with the highest profits are given prizes.
A Fund manager works in a very similar manner, the major difference is that the funds are real. The Fund manager is also held responsible for his trading and investment decisions. He is accountable to his investors, and as such he is expected to trade in a disciplined and rational manner. It’s almost like a game of chess, every investment or trading decision has to be well planned and its results carefully considered.
“A man who fails to plan has failed already”
The key principle behind Fund management is diversification.A Fund manager is expected to spread out his or her risk. A manager trading the currency market would not be expected to tie his or her entire account to one trade. A more reasonable approach would be to divide the account into several parts, and trade several markets so that a heavy or serious loss from one market does not heavily depreciate the account.
As a means of diversification, most Fund managers invest in stocks, treasury bills, Government bonds, and a lot of times in the currency markets. Like a lesson from an old wife’s tale, it’s never smart to put all your eggs in one basket.
Money Management Plan
The first step to Fund management is developing a money management plan for the entire account. Here the manager has to decide on how much of the account or portfolio will be actively engaged in trading at any point in time. This specifies the entire risk exposure on the portfolio or account.
With diversification being the underlying principle, even the funds actively traded are spread across several markets, as a means of protecting the account or portfolio from a catastrophic loss. The markets selected should not be positively correlated markets i.e. they should not be markets that move in a same direction.
Below is an example of a diversification plan, with funds traded across several currency pairs.
After developing an adequate money management plan, the next step requires the manager to have a series of profitable trading strategies. These strategies are usually strategies that yield profit over a long-term. The Fund manager isn't interested in the “Get-Rich-Quick” strategies, only strategies that show a reasonable average profit after being tested over all long period of time.
In the social trading contest, our selected signal providers represent our Fund strategies. We would only be interested in signal providers who have been able to consistently prove themselves over a reasonable period of time. A trader with the highest profit and equity does not essentially mean the trader would make a good signal provider; considering the contest conditions, a lot of traders trade with high leverage. A better judge of performance would be considering the trader’s pip count. A trader who consistently makes a reasonable number of pips month in and month out qualifies as a reliable signal provider.
Even though most well known fund managers manage billions of dollars, a Fund manager’s primary aim is to preserve capital and consistently grow profits; hence their annual returns rarely if ever hit 3-digit figures. The best Fund managers are those who have been able to consistently make profits over a long period of time.
According to Forbes, the year 2011 was a terrible year for most fund managers. The U.S stock market made a very tiny gain, and this saw a lot of Fund managers losing heavy amounts. Bridgewater Associates, the world’s largest hedge fund, still came out on top with an annual net profit in the 20% range.
The chart below shows the S&P 500 price action from July– August 2011.
Like most things in life, fund management requires a lot of planning and preparation, and the greatest Fund management companies are not just the ones who make gigantic profits, but the ones able to generate profits consistently. A conservative money strategy to control exposure, a diversified trading and investment plan, and the discipline to follow through; these are all traits of very successful Fund managers. Something I aspire to become someday.