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Difference Between Hedge Funds and Mutual Funds

May 18, 2012 Posted by Admin

Hedge Funds vs Mutual Funds
 

Mutual funds and hedge funds are both managed by portfolio managers who select a number of attractive securities, pull them into a portfolio and manage them in a manner that provides the highest return to investors of the fund. Mutual funds and hedge funds are quite different to each other in terms of fees charged, regulations they are subject to and types of investors who invest in each. The following article will clearly explain these characteristics for each fund and outline their differences.

Mutual Funds

A mutual fund represents a pool of funds that have been collected from a number of investors which is then utilized in investments such as stocks, bonds and other money market instruments. The fund is managed by a ‘fund manager’ who will manage the investments in these securities in a manner that derives capital gains and investment income for the fund’s investors. The investments made in a mutual fund are usually governed by a prospectus, and managers must ensure that investments are made to match the objectives outlined in this document.

Mutual fund investments are open to anyone and are, therefore, subject to a number of regulations such as the Securities Act of 1993, and must be registered with the Securities and Exchange Commission (SEC) to operate. Mutual funds are also obligated to pay a fiduciary duty for the income obtained from the fund’s operation.

Hedge Funds

A hedge fund, on the other hand, is much more aggressively managed and often undertakes more high level and risky investment strategies. These funds can operate within the domestic and international markets and are managed in a manner that offers the highest return. As a result of the risky investments that are made, hedge funds are mostly open to a selected number of sophisticated investors and require them to make a very large investment. Furthermore, they require the funds in a hedge fund to be held for a minimum of one year, which reduces liquidity for its investors.

Since hedge funds are only open to a number of private investors, they are not regulated by the SEC and are not required to submit reports on their performance. However, they are also subject to a fiduciary duty on their income.

Hedge Funds and Mutual Funds

Both hedge funds and mutual funds are managed by portfolio managers and are operated with the sole purpose of making higher returns. Hedge funds make riskier investments using advanced investment methods, while mutual funds are safer and invest in safer securities such as stocks and bonds. Mutual funds provide small investors the opportunity to invest in a portfolio of securities which is quite impossible to do with a small capital in hand. Hedge funds, however, are for risk seeking investors who have ample capital and require a faster and larger return during a shorter period of time.

Summary

Hedge Funds vs Mutual Funds

• Mutual funds and hedge funds are both managed by portfolio managers who select a number of attractive securities, pull them into a portfolio and manage them in a manner that provides the highest return to investors of the fund

• A mutual fund represents a pool of funds that have been collected from a number of investors which is then utilized in investments such as stocks, bonds and other money market instruments.

• A hedge fund, on the other hand, is much more aggressively managed and often undertakes more high level and risky investment strategies.

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Filed Under: Investment Tagged With: hedge funds, mutual funds

About the Author: Admin

Coming from Engineering cum Human Resource Development background, has over 10 years experience in content developmet and management.

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