Assets Under Management (AUM)

Assets Under Management (AUM): Financial Term Definition

Assets under management, or “AUM” for short, represents the amount of capital managed by an investment firm on behalf of its clients.

Common examples of investment firms in the financial services industry where the AUM metric pertains include the following types:

• Private Equity (LBO)
• Hedge Funds
• Growth Equity
• Mutual Funds
• Venture Capital (VC)
• Real Estate
• Fixed Income
• Exchange Traded Funds (ETFs)

How to Track Assets Under Management (Step-by-Step)

The AUM of a fund is constantly changing and the method to calculate the metric is also specific to the industry.

• Hedge Fund → A hedge fund’s AUM can move up or down based on the performance of its portfolio returns, i.e. the market value of the securities owned changes.
• Mutual Fund → A mutual fund’s AUM can be impacted by the inflows / (outflows) of capital in the fund, such as if an investor decides to provide more capital or remove some of their capital (or if the mutual fund issues dividends).
• Private Equity → A private equity firm’s AUM tends to remain more “fixed”, as capital raising occurs periodically with a set dollar amount raised. The actual AUM is typically unknown, as the actual market value of the investment is unknown until the date of exit (i.e. when the investment is sold via a sale to a strategic, a secondary buyout, or an IPO), contrary to the public equities market where securities trade constantly. In addition, there are lock-up periods in the agreements that can last long periods, where the limited partners (LPs) are prohibited from withdrawing funds.

Assets Under Management (AUM) and Fund Returns

How AUM Impacts Private Equity Fund Returns

The greater the assets under management (AUM), the more difficult it becomes for the firm to achieve outsized returns because the number of potential investment opportunities declines and the capital at risk is greater.

As a result, most if not all large institutional asset management firms are “multi-strat”, a catch-all term referring to firms that utilize a diversified range of investment strategies, most often in separate investment vehicles.

Given the sheer magnitude of the capital managed, these institutional firms must become more risk-averse over time and diversify into various asset classes.

Because of the wide range of strategies employed, the multi-strat approach offers more stability in returns in exchange for less risk and more downside protection as each different fund strategy essentially functions as a hedge against all the other funds.

For instance, a multi-strat firm can invest in public equities, bonds, private equity, and real estate to allocate the risk across different asset classes and overall de-risk its portfolio holdings.

Considering their AUM, capital preservation often takes priority over achieving outsized returns – albeit, certain funds might take a more aggressive approach in the pursuit of achieving higher returns, which is offset by the other strategies.

For the same reason, on the flip side, certain firms intentionally place a “cap” on the total amount of capital raised per fund to prevent their returns profile from deteriorating.

For example, it would be out of the ordinary and very uncommon for a lower middle market (LMM) private equity firm to be competing with mega-funds to acquire a target company valued at $200 million, as that type of valuation (and the potential returns) is insufficient to interest larger firms.

Even if PE firms in the LMM space could raise more capital, their priority is typically achieving high returns for their LPs rather than maximizing their fund size, even if it means lower management fees.

How AUM Impacts Hedge Fund Returns

Likewise, the top hedge funds managing billions in total capital such as Point72 will also not invest in small-cap stocks, despite the fact that there are more opportunities for arbitrage and mispricing in the market due to the lower market liquidity (i.e. trading volume) and less coverage from equity research analysts and the press.

To reiterate from earlier, as the assets under management (AUM) of a firm increases, achieving excess returns becomes increasingly challenging.

One reason is that it becomes near impossible for the hedge fund — an influential “market mover” here — to sell its stake (and realize its gains) without the stock price of the small-cap company declining, which effectively reduces its returns.

Each move by hedge funds is closely followed by the market, and the sheer dollar amount of their investments alone can cause the stock price of a small-cap company to move up or down.

If a large institutional hedge fund sells its shares, other investors in the market assume the firm – considering it has more connections, resources, and information – is selling its stake for a rational reason, possibly resulting in less buying interest from the broader market.

• Less Order Volume + Increased Selling → Lower Share Price

Therefore, the largest hedge funds in terms of AUM are limited to investing in only large-cap stocks. And since large-cap stocks are widely followed by equity research analysts and retail investors alike, those stocks tend to be more efficiently priced.

BlackRock Assets Under Management (2022)

BlackRock (NYSE: BLK) is a global, multi-strategy investment firm and one of the largest global asset managers, with over $10 trillion in total assets under management (AUM).

The screenshot below shows BlackRock’s AUM as of June 2022 segmented on the basis of:

• Client Type
• Investment Style
• Product Type

^{BlackRock Q2 2022 Earnings Release (Source: BlackRock)}

AUM vs. NAV: Differences in Investment Fund Metrics

A common misconception is that assets under management (AUM) and net asset value (NAV) are identical.

NAV, or “net asset value”, represents the total value of the asset’s managed by a fund after deducting fund liabilities.

Furthermore, the net asset value (NAV) is often expressed on a per-share basis, reflecting how the use case of the metric is more related to mutual funds and exchange traded funds (ETFs).

While stating the obvious, the AUM cannot be expressed on a per share basis Even if hypothetically AUM could somehow be standardized on a per share basis, it would be impractical given the returns distribution (i.e. J-Curve) among others.

In short, assets under management (AUM) represents the total value of assets managed by a firm — of which a significant portion could be sitting on the sidelines — as opposed to a mutual fund or ETF like the net asset value (NAV).