What is Equity Management?

//What is Equity Management?
What is Equity Management? 2017-10-04T07:25:58+00:00

Definition: Equity management is the management of the outcome of an entity’s assets without factoring for liabilities.

What Does Equity Management Mean?

Before dissecting asset management, it must be explained what qualifies as equity and how its component parts are defined:

Equity = Assets – Liabilities

Assets are defined as any property or resource that has a tangible value. The value of assets is determined by their market value at the time of calculation.

Liabilities are defined as any debt that is owed by an entity.

What is the definition of equity management? Once equity is determined, EM refers to the decisions made regarding that equity. The general goal of EM is to maximize and grow the amount of equity that is already available as well as avoid any foreseeable risks.

Businesses typically engage in EM as standard practice. There are several different EM strategies that are employed by businesses. In business, equity managers typically work by investing an organization’s equity in certain stocks. The different strategies of EM are contingent upon investment philosophies. One philosophy relies primarily upon technical algorithms to develop investment strategy. Another philosophy is to run regression analyses on different markets, to determine the best investments.

Example

John owns a thriving Hedge Fund firm. He has been able to successfully aggregate a large clientele and wants to increase his firm’s value through EM in order to take on larger clients.

John’s numbers for the 2016 fiscal year:

  • Assets: 20 million USD
  • Liabilities: 15 million USD
  • Equity=Assets-Liabilities

Thus, the total equity of John’s Hedge Fund firm is 5 million USD. John subsequently hires a group of equity managers. The equity managers decide to invest 50 percent of the Hedge Fund’s total equity using a technical algorithm that predicts stock fluctuation. However, they do not invest the entire 2.5 million USD all at once. The equity managers will carefully invest the total in incremental amounts, reinvesting and balancing the portfolio at various intervals according to market predictions, algorithmic calculations and risk management analyses.