Why do investors obsess over AUM? The metric that many misunderstand.

In the financial world, there is a metric that investment managers never ignore: AUM or Assets Under Management. But here comes the interesting part: most investors believe that a larger AUM always means better performance. Spoiler: it does not.

Decoding AUM: beyond the numbers

The Assets Under Management (AUM) represents the total market value of the financial assets that an entity controls on behalf of its clients. Whether it's a traditional mutual fund, a venture capital firm, or a decentralized DeFi protocol, AUM captures the true scale of operations.

But here is the detail: not everyone calculates AUM in the same way. Some include bank deposits and cash, while others only consider funds under discretionary management. This variability is crucial to understand before comparing managers.

The AUM game on Wall Street

Investment management firms have turned AUM into their favorite marketing tool. A large number attracts investors. A growing number communicates success. And here arises the question: does the increase in AUM reflect true performance or just capital inflow?

Reality is dual. AUM fluctuates with the inflow and outflow of funds in the market, but also with the performance of the underlying assets. A manager can grow for two reasons: they invest their assets well ( their assets appreciate ) or they are good at selling ( attract more money ). The AUM metric does not always distinguish between the two.

The size paradox: when more is not better

Here comes the uncomfortable lesson that no one wants to hear. A large S&P 500 ETF that manages hundreds of billions of dollars does not necessarily outperform smaller funds with just a few million under management.

Why? Investment strategies have capacity limits. When AUM exceeds certain thresholds, efficiency deteriorates. A small fund with a surgical focus often generates superior returns precisely because it has fewer assets to move. The strategy, not the volume, is what matters.

How managers monetize AUM

This is where the circle closes. Investment management firms charge fees as a percentage of AUM. The larger the AUM, the higher the revenues, regardless of actual performance.

This structure creates an interesting incentive: managers are motivated to grow the AUM, not necessarily to maximize returns. Financial professionals often focus on attracting high-net-worth investors, knowing that this multiplies their base commissions.

AUM in the DeFi era: the metric remains king

Even in decentralized finance, AUM remains a central indicator. DeFi protocols actively promote the total value of locked assets (TVL, a sister metric to AUM). The metric continues to function as a snapshot of scale and relevance in the ecosystem.

Conclusion: use AUM, but don't be fooled

The value of AUM remains a cornerstone for assessing financial entities. It provides information on scale, reach, and market influence. But knowing this metric is not enough. Combine AUM analysis with performance history, fee structure, and operational capacity. A growing AUM can signify opportunity or a warning sign. It all depends on what you look beneath the numbers.