Money managers buy and sell stocks, bonds, and other instruments on behalf of the clients whose accounts they manage. Money managers are available in all shapes and sizes. There are large firms that manage hundreds of billions of dollars. This group includes familiar names in the universe of banks, insurance companies, and brokerage firms. It also includes large independent money management firms that were started many years ago by people who left the large banks and insurance companies. And then there are the small independent money managers, the so-called boutiques. Hedge funds are an important part of the boutique money management business.
Money managers make a distinction between separate accounts and commingled accounts. Separate accounts have just one investor, while commingled accounts have two or more investors. Even if the separate account is a joint account belonging to Mr. and Mrs. Jones, there are no other couples invested in that account. In a commingled account, Mr. and Mrs. Jones will invest alongside Mr. and Mrs. Smith. Most money management firms will have a minimum size requirement for setting up a separate account.
Mutual funds and hedge funds are both commingled accounts. Many underlying investors pool their assets to create a single larger pool of assets that can be properly diversified and that is large enough to command the attention of a skilled money manager.
The job of the money manager is not to hold the assets or to execute trades but to exercise trading authority over the account. The assets will typically be held at a bank or a brokerage firm. Trade execution will be provided by stockbrokers, bond dealers, and similar providers. The job of the money manager is to decide whether to buy or sell certain stocks, whether to be long or short U.S. Treasury bonds.
