## AUM - The most important measure of an investment manager's size and performance

In the financial world, it often comes down to understanding how much money an investment manager actually controls. This is where "Assets Under Management" (AUM) comes into play. AUM is not just a number – it is a fundamental indicator of how much trust investors have placed in a given institution, whether it be traditional investment funds, venture capital firms, or modern decentralized finance platforms (DeFi).

## What does AUM actually tell us?

AUM represents the total market value of all financial assets that a manager is responsible for managing on behalf of their clients. It can include everything from stocks and bonds to cryptocurrencies and other alternative investments. By looking at a manager's AUM, one gets a quick overview of the size of their operations and their market position – a sort of scorecard for their influence and credibility in the financial sector.

## How is AUM calculated in practice?

There is no universal calculation method for AUM. Different institutions use different approaches. Some include all liquid assets, including cash and bank deposits, while others only count assets under discretionary management. Certain DeFi protocols only count the locked assets in their smart contracts. This variation is due to the fact that each category of manager has its own regulatory requirements and branding.

## AUM is constantly moving – and it means something

AUM is far from static. It changes daily based on market prices of the underlying assets and on the influx or outflow of new investor money. When the market rises, AUM grows. When investors pull their money out, it falls. Many investment firms use rising AUM as a selling point – it signals growth and success. However, one must be cautious: higher AUM does not always mean better results. A large S&P 500 ETF with hundreds of billions under management can often be outperformed by a smaller fund with only a few million dollars if the strategy is better. Here it holds true: the quality of the investment strategy matters more than size.

## The Limit of Capacity – AUM Can Become Too Large

An important nuance that is often overlooked: every investment strategy has a capacity limit. When AUM becomes too large relative to the size of the strategy, performance can actually deteriorate. This means that a manager may sometimes be better off closing to new investors, even though more AUM would generate higher fees – a strategic choice that prioritizes long-term performance over short-term earnings.

## The fee structure is directly related to AUM

Here is a central point: most investment management companies charge their fees as a percentage of AUM – often referred to as "management fees." A typical rate can be 0.5-2% annually of the total amount under management. This means that AUM directly impacts a manager's top-line earnings. As AUM grows, so do fee revenues – without the manager necessarily having to perform better. This creates a financial incentive for managers to focus on growing AUM.

## AUM as a Competitive Parameter

Institutions constantly compare their AUM with historical data and competitors. Increasing AUM is used to signal momentum and market confidence. It also helps the manager attract new investors – potential clients often assume that large institutions are more reliable. However, this is not always true, and it is important to assess performance without letting the size of AUM alone guide your investment decisions.

## Concluding thoughts on AUM

AUM serves as a critical barometer for an investment manager's size, influence, and financial success. It is relevant across all types of financial institutions – from traditional investment funds to modern DeFi platforms. While high AUM can signal trust and stability, it is important to remember that size does not guarantee future success. A well-informed investor should always assess both AUM and actual performance before making an investment decision.