What is Assets Under Management (AUM)?
Assets under management (AUM) is the total market value of all the financial assets which an individual or financial institution such as a mutual fund, venture capital firm, or depository institution or a decentralized network protocol controls, typically on behalf of a client. Funds may be managed for clients, platform users, or solely for themselves, such as in the case of a financial institution that has mutual funds or holds its venture capital. The definition and formula for calculating AUM may differ from one entity to another.
How is AUM Calculated?
AUM is calculated by taking the total market value of all the assets that an institution manages. This includes cash, securities, and other assets. For example, if a mutual fund has $1 billion in assets under management, it means that the fund has $1 billion worth of assets, including cash, stocks, bonds, and other investments.
What is AUM Used For?
AUM is used to measure the size and success of an investment management firm. It is also used to compare different investment management firms. For example, if two mutual funds have the same investment strategy, but one fund has $1 billion in AUM and the other fund has $100 million in AUM, the fund with $1 billion in AUM is likely to be more successful.
What are the Benefits of AUM?
There are several benefits to having a large AUM. These benefits include:
Economies of scale: Larger investment management firms can benefit from economies of scale. This means that they can spread their fixed costs over a larger number of assets, which can lead to lower fees for investors.
Diversification: Larger investment management firms can invest in a wider variety of assets. This can help to reduce risk and improve returns for investors.
Access to capital: Larger investment management firms have access to more capital than smaller firms. This can allow them to invest in larger and more complex assets.
What are the Risks of AUM?
There are also some risks associated with having a large AUM. These risks include:
Herding: When a large number of investors are all following the same investment strategy, it can lead to herding behavior. This can lead to asset bubbles and crashes.
Market power: Larger investment management firms can have more market power than smaller firms. This can allow them to extract higher fees from investors and influence the market.
Regulatory scrutiny: Larger investment management firms are subject to more regulatory scrutiny than smaller firms. This can add costs and complexity to running a business.
AUM is an important metric for investment management firms. It is used to measure the size and success of a firm and to compare different firms. There are both benefits and risks associated with having a large AUM. Firms should carefully consider these factors when making decisions about how to manage their assets.