Difference Between Hedge Funds And Mutual Funds

Hedge funds and Mutual funds are two popular pooled investment vehicles, in which a number of investors entrust their monies to a fund manager, who invests the same in different kinds of publicly traded securities.

When it comes to investing, there are those who invest their funds themselves and there are those who tender their funds to professional fund managers. With the latter option, you have the luxury of employing the expertise of professionals who are more qualified than you are to make decisions on your behalf.

Hedge funds and Mutual funds are two popular pooled investment vehicles, in which a number of investors entrust their monies to a fund manager, who invests the same in different kinds of publicly traded securities.

A mutual fund offers the investor an opportunity to make an investment in a diversified and professionally managed basket of securities, at comparatively low cost.

Whereas, a hedge fund is a partnership of investors that usually use high-risk investment strategies to yield high rates of returns using a diverse range of trading techniques.

Another way to look at it in simpler terms, is that everyday individuals can invest in mutual funds, but for you to invest in a hedge fund, you’re going to need a whole lot of money. As such, institutional investors are those who predominantly invest in hedge funds.

Differences and Similarities

There are a number of similarities between these two types of funds as they are both pooled investment vehicles that are professionally managed. The managers pick the securities to be held in the fund and invest the money of a number of investors in one portfolio.

More so, both hedge funds and mutual funds are investment funds designed to provide return opportunities for investors through professional management and diversification among holdings.

The degree of diversification varies widely among funds. Mutual funds will often be focused on a single market sector or asset class while hedge funds will often spread their holding over a number of sectors.

There are however, a number of differences between hedge funds and mutual funds and these include the following:

Exclusivity

While mutual funds are readily available investment vehicles to most investors, hedge funds are restricted to accredited investors who pool their money together to buy assets.

Additionally, there are other barriers to entry with hedge funds, such as generally higher minimum initial investments than with mutual funds. By contrast many mutual funds have very low minimum investment requirements, some as low as $100.

Investment style

Hedge funds are aggressively managed, where advanced investment and risk management techniques are used to reap good returns, which is not in the case of mutual funds.

Number of investors

The owners of a mutual fund are large in number, i.e. there can be thousands of owners of a mutual fund. However, owners of a hedge funds are typically limited in number.

Returns

Hedge funds seek absolute returns. Conversely, mutual funds seek relative returns on the investment made in securities.

Cost

Most hedge fund investors are high net worth investors, while mutual fund has small and retail investors. Also, the management fees depend on the percentage of assets managed in mutual funds. As opposed to hedge funds, where the management fees are based on the performance of assets.

Disclosure

In mutual funds, the reports are published yearly, and disclosure of the performance of assets is made half yearly. As opposed to hedge funds, where the information is provided to investors only, and there is no disclosure of operations publicly.

Liquidity

Liquidity is a very different between hedge funds and mutual funds. With a mutual fund, investors can sell shares one day and the sale will go through at the close of trading that day as long as they have their trade in by the deadline for the fund.

Hedge funds often restrict the ability of investors to access their money to set periods during the year. There may also be an initial lockup period of one year or more.

If you are an amateur to the capital market and wants to invest in one of these two funds, then you can make a choice as per your resources. If you have a large amount of money, then you can go for hedge funds, whereas if your investment amount is low then you can opt for mutual funds.

Written by Lawretta Egba.