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What Do Index Fund Advisors Do?

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  • Written By: Geri Terzo
  • Edited By: Shereen Skola
  • Last Modified Date: 07 November 2016
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An asset manager who oversees index funds often uses a passive investment strategy, making broad investments in the market based on long-term goals. Subsequently, index fund advisors are not switching in and out of financial securities, such as stocks or bonds, every day. Instead, these managers build investment portfolios that mimic trading in some other industry benchmark and attempt to generate performance that is inline with that other fund. Fund managers might seek to replicate performance across asset classes, including equities, bonds, and commodities, and could oversee funds that are tied to the traditional or alternative markets.

As long as an index fund advisor is overseeing a portfolio that is performing as good as an industry benchmark, he or she is probably doing their job. The role does not involve a heavy amount of research because these portfolio managers are not making stock or bond selections. Instead, they are running a fund that is similar to another proven market index. When there are changes to an industry benchmark, index fund advisors are likely to respond by making similar realignments.

The fees that index fund advisors earn are typically lower than compensation for active managers, who are frequently changing positions in financial securities. Investors pay index fund advisors to generate profits that are average based on market performance, and subsequently the costs to invest are usually relatively low. Active managers, on the other hand, are paid higher fees to attempt to produce better-than-average returns.

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Traditional index fund managers may oversee a mutual funds, which are investment portfolios filled with many different financial securities. These money managers usually take long positions, which are trades based on the expectation that financial securities will rise in value. A common type of index fund is one that is meant to perform similarly to the broad stock market in a region. Index funds could be categorized by industry, region or the size of securities in the portfolio, for instance. The way that index fund advisors approach investing is usually explained in a prospectus, which is a public document that mutual fund managers file with regulators.

Other professionals may run indexes in the alternative asset management category, such as hedge funds. These index advisors oversee portfolios that represent trading in a hedge fund strategy. Hedge funds are sophisticated investment funds that use risky strategies including shorting, which is investing on the premise that financial securities are likely to decline. Index advisors attempt to earn profits that reflect the performance of common hedge fund strategies.

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