Investors are different from each other. Some of them have all the time in the world to manage their money. However, a larger chunk of investors don’t have the time—and the patience to manage their money.
This leads them to hiring a money manager, perhaps a hedge fund manager, or they may invest in a mutual fund or an exchange-traded fund (ETF).
The first factor to consider would be the costs and expenses. Let’s see how you should weigh them out.
Starting Expenses
This is perhaps the first consideration for many investors. If you want to have your money managed, you have to think about the expenses and the costs that you will have to shoulder. It’s the same when you’re thinking of pouring your money into a particular investment.
Theoretically, you can buy ETFs at one share at a time. This means that the minimum investment is, in general, negligible.
On the flip side, if you plan to invest in mutual funds, you will be required to meet a minimum investment to open an account. For many investors, especially in the younger side, believe that the typical $500 to $1000 or more initial deposit is a lofty initial investment.
Hedge funds are not so much different. These funds have a higher threshold. In general, most hedge funds require their investors to own as much as $5 million in investments. The investors should also have a minimum net worth and/or sizable income stream of around $300,000 or somewhere in that range. Some require even higher.
General Costs
For the case of ETFs, you will have to shoulder transaction costs that vary from broker to broker. One broker may charge higher or lower than what your current broker is charging. However, in most instances, the overall costs are quite small. It’s usually less than 2 percent of the total amount invested.
On the other hand, services on investment advisory and money management firms normally charge around 1 to 2 percent of your total assets per year for the management and advisory fees. You might also have to pay some brokerage fees on top of that. Doing the math, the annual returns you must obtain to break even can quickly hit 5 percent or more each year.
Mutual funds can definitely levy huge fees. These may vary depending on how the fee structure has been laid out. However, funds by law can require a front-end load of up to 8.5 percent, which can be really huge bummer on profits for years.
Meanwhile, hedge funds usually charge annual management fees of around 1 to 2 percent. Then, it would retain some 20 percent of the profits that you earn.
What to do with the costs?
Costs vary a lot and if you’re trying to figure out which money management system fits you best, you’ll have to figure out which one is truly worth your money. In general, a firm that charges high fees can also generate high returns for its investors.
On the flip side, this is not always the case. In many instances, high fees and charges only eat away at your returns and profits.