Ruairi O'Donnellan

How to Become an Asset Manager

Asset management – in its broadest sense – is the management of portfolios of assets by professional firms serving institutional, high net worth (HNW), and retail clients.

It is a highly-respected industry, employing millions of investment professionals worldwide who are responsible for handling trillions of dollars of client money and therefore require the knowledge and skills to assume the myriad responsibilities of an asset manager from analyzing securities and markets to transacting/trading in the market to managing client portfolios.

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To be successful, an asset manager must have strong knowledge of a number of key areas within the finance industry, notably:

  • Understanding risk and return
  • Portfolio management
  • Asset allocation
  • Performance measurement
  • Quantitative trading
  • Economic analysis
  • Technical analysis
  • Risk management

Understanding Risk and Return

When choosing stocks, you will typically choose those that give you the highest returns.

Stock returns are a function of the dividends paid and stock price appreciation.

If we use the adjusted closing prices of stocks, the prices will have already been adjusted for corporate actions such as dividends.

Therefore, stock returns simply become a function of the appreciation in the adjusted closing prices.

Unfortunately, stock returns are specific to the time period over which they are measured, they don’t necessarily infer anything about future returns.

However, broadening our data set and performing the calculations over a number of periods reduces sample bias. Averaging these returns then gives us a better indication of future returns.

But knowing the expected return is only half the story because the stock with the highest return could also be the most volatile. So, while you may be expecting a high return if the stock performs, you could lose a lot of money if it underperforms.

Asset managers therefore need to know the expected return and the volatility associated with that return. 

Portfolio Management

Effective portfolio management requires in-depth knowledge on a number of key areas, including:

  • The capital asset pricing model
  • APT and factor models
  • Factor based investing
  • Efficient markets
  • Passive versus active approaches to portfolio management
  • Behavioral theory
  • Investment policy statements
  • AI applications
Effective portfolio management is key to successful asset management

Asset Allocation

Asset allocation is the process of deciding how an investment portfolio should be distributed across different asset classes.

Asset allocation has moved far beyond the traditional view of diversification. Sophisticated IT systems can process huge amounts of historical performance data which enables investors to construct optimal portfolios.

To build a market efficient portfolio or one that has the potential to generate an above-market return, an asset manager must be able to understand the risks, expected returns, correlations, and other characteristics of different classes of assets.

The approach to achieving such a return will vary according to the size and nature of different investors and their time horizon. Investors today are more sophisticated than ever before and have high expectations from fund managers.

The impact of market crashes, declining interest rates, and the advent of alternative investments has had a significant effect on the way asset managers invest funds across different assets classes.

Performance Measurement

To be a successful asset manager, you must be able to accurately measure asset performance.

This requires the application of techniques such as the Sharpe ratio and other well-known approaches to portfolio performance measurement, and use attribution analysis to identify the sources of excess performance.

Quantitative Trading

Quantitative finance involves the mathematical modeling of financial markets and securities.

Quantitative trading is a subset of this area that covers all aspects of using mathematical methods in trading markets.

Many pioneers of quantitative trading started with pen and paper, looking for patterns in price actions and predicting moves on the back of this.

But in today's world, quantitative trading generally means using computers to perform the necessary calculations, though strictly speaking this is not always necessary.
Asset managers must have strong knowledge of quantitative trading

Economic Analysis

A successful asset manager needs a solid understanding of economic principles, including:

  • GDP
  • Business cycles
  • Inflation
  • Employment/unemployment
  • International trade
  • Monetary and fiscal policy analysis

Technical Analysis

Technical analysis is the study of historical market price action, primarily through the use of charts, to predict future price movements and trends.

Because it makes so much use of charts, technical analysis is known as charting and this can be defined as the visual study of human psychology highlighting the reactions of market participants to changing market conditions.

Technical analysis is a popular trading and investment technique that can be used on its own or alongside fundamental analysis.

It can be applied to all asset classes – stocks, bonds, foreign exchange, commodities, and so on. In fact, technical analysis can be applied to any traded instrument where the price is influenced by the forces of demand and supply.

Risk Management

Asset management is big business.
The industry facilitates the investment of trillions of dollars of individual and institutional money in a wide range of funds and other investment vehicles.
As with banking, the global financial crisis and its repercussions focused minds on the risks associated with the activities of asset managers.
The consequence was a raft of new legislation and increased regulatory activity, as risk management in the financial sector came under greater scrutiny.
The inherent differences between asset managers and banks – notably those related to financial stability risks – meant that the asset management industry escaped the most onerous new rules.
However, asset management firms today are expected to enhance the efficiency, stability, and resilience of the financial system.
As such, there are significant risks associated with the business that must be managed appropriately.
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