Hedge Fund Vs Mutual Fund
The fundamental difference between hedge funds and mutual funds is:
- Hedge funds are regarded as private investments and are free to trade in anything; on the contrary Mutual funds are regulated investments and are limited to investing in publicly traded securities.
- Hedge funds focus on high-risk investments that offer much higher rewards; Mutual funds may be safer since investment involves low-risk funds that offer reasonable returns.
Selecting from a broad spectrum of investment avenues to build a valuable investment portfolio is a bit of a task. Especially if you are caught in a dilemma between Hedge funds vs Mutual funds. The debate between mutual fund vs hedge fund is something that will always put the investor in a dilemma. This article will shed some light to explain the difference between mutual fund and hedge fund, so you can make wise investment choices that suit your portfolio and safeguard you from inflation. This article gives elaborate information about hedge funds and mutual funds.
What is a Hedge fund?
Hedge Fund
Hedge funds are alternative investments that pools capital from various investors to invest in varied assets that generally deal with high risk to provide a higher return.
The investment strategy behind hedge funds is to aggressively chase high return stocks, hence the name high-risk funds. The investment objective of hedge funds is to build private portfolios that can be opted for by a few accredited investors. Hedge funds offer lucrative investment options to high net worth individuals by employing a myriad of investment strategies leveraged from both long-term and short-term positions. Hedge fund managers use long positions to buy more stocks and engage in short positions by investing in asset classes and eventually sell the stock to leverage from a bull market scenario.
What is a Mutual fund?
Mutual Fund
A mutual fund is a type of investment option in which investors pool their money to earn returns. This collective amount is then invested in securities like bonds, stocks, and other assets. This kind of investment is generally managed by an investment professional known as a fund manager.
A mutual fund follows an elaborate investment strategy to avoid risks and instead takes investment decisions that follow safer investment types. Mutual funds are suitable for retail investors who choose to lock their money in the safe haven of mutual funds as they have a low-risk tolerance. Mutual funds are pooled from investors to invest in various securities, bonds, etc., and are usually managed by professional mutual fund managers.
Regulation
Since mutual funds are available for the general public, it is highly regulated by The Securities and Exchange Commission to safeguard the interest of the investors. Mutual funds aim to trade securities by following a strategy to make investments in bonds or shares that offer higher returns with minimum risks. According to the Securities act 1933, the prospectus is mandatory for providing transparency and to safeguard the investor’s rights. The same act requires the hedge funds to be open to only accredited investors.
Government Regulation – Hedge Fund Vs Mutual Fund
The Similarities Between Hedge Fund and Mutual Fund
Before understanding the key differences, let’s take a look at the similarities between mutual funds and hedge funds. Hedge funds and mutual funds are investment vehicles that pool investment funds from a large number of investors by a fund company that charges management fees. Both funds intend to diversify investments by investing in a wide arena of securities like equity, assets, real estate, etc. Some funds have an exception as they may be invested in one security type or one sector, especially mutual funds. Portfolio management is carried out by portfolio managers or management firms which charge a management fee.
Differences Between Hedge Funds vs Mutual Funds
| Differences | Hedge Funds | Mutual Funds |
| Diversification | Hedge funds are invested in a broad spectrum of security types like shares, bonds, commodities, etc. | Mutual funds focus on specific securities and certain economic sectors |
| Financial management | Hedge funds may be actively managed by a hedge fund manager or management company. So, a manager can use his expertise while investing and decide when to trade. | Mutual funds are actively and passively managed. If passively managed, the fund manager follows the guidelines of the benchmark index fund derivatives while managing the holdings. |
| Accessibility | Investors are required to have a minimum net worth of $1 million to gain access; this minimum investment is more than mutual funds | Mutual fund investors can begin with a minimum amount of just $100. Investors don’t have to be high net worth clients, and hence the general public can access it. |
| Expenses | Hedge expenses are more than 2%. Hedge funds are subject to performance fees as well as an annual charge. | Mutual funds expenses do not exceed 1%. Also, mutual funds have an expense ratio, so performance fee is part of the fee structure. |
| Returns | An investor will receive a benefit of a fair return on investment irrespective of recession or the booming stock market. However, when the market performance declines, the average stock fund declines too. Returns will not rise in a bullish market. | In the long run, even the low-cost mutual fund will fetch higher profit than the hedge fund, irrespective of stock exchange performance. |
| Liquidity | Hedge funds often come with lock-up periods, and an investor cannot use his capital or profits during that period. | An investor can gain in terms of liquidity because mutual funds offer more flexibility and may not have a lock-in period because these funds are traded daily in the stock market exchanges. |
FAQs
1) Is a hedge fund worth it?
Investors will benefit from funds offering memorandum and limited partnerships that are used to govern the hedge funds. Hedge funds employ various tactics via options, leverage, short selling, etc. If investors want to enjoy more returns from the stock markets, financial advisors give the advice to invest in hedge funds. You must practice caution and check out the ratings and reports from the industry professionals before investing through trusts, insurance companies, an organization, banks, etc. offering hedge fund services.
2) What makes a successful hedge fund?
Top hedge funds use a reasonable approach to cut out the risk and volatility of the share market. Partners of hedge fund companies employ a variety of schemes to deliver more profit with lower costs.
3) Is a mutual fund a good choice?
If an individual has an expectation of low-risk investments, then a mutual fund is suitable for such occasions. If you are content with a reasonable return, then you can opt from the group of top-performing mutual funds. Low-income savings, lower fees, lower range of diversification are some benefits of mutual funds. Limitations of mutual funds are that bye-laws prescribe mutual funds to not indulge in an IPO and cannot invest in other economies.
4) How much money should I invest in a mutual fund?
In case you are planning to invest in a mutual fund, you can browse through the mutual fund site of your choice that will give you an idea of various brackets available. However, you can begin with as low as $100, like with Charles Schwab funds, while there are others like Vanguard funds that offer mutual funds at $3000.
The bottom line is that mutual fund hedge funds play a different part for investors as funds are invested in different types of funds through pooled investments. Hedge fund mutual funds deliver a unique experience to their investors as per their different investment requirements.
