HEDGE FUNDS VS MUTUAL FUNDS: 7 key Difference You must know

hedge funds vs mutual funds
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New investors often group hedge funds vs mutual funds under the same umbrella. But basically, there are different from each other. Hedge funds usually favor rich investors while mutual funds favor the average man.  Helping you understand the differences between them. We will also look into hedge funds and mutual fund performance as one of our objectives in this article.

Why Is It Called a Hedge Fund?

To sum up, hedge funds are so named because they employ various hedging strategies to mitigate the risk inherent in their investors’ holdings. As private capital ownership grows globally and large-scale capital owners seek to protect their wealth from volatile markets, these vehicles are gaining in popularity.

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Hedge Funds vs Mutual Funds

Before we go further into their difference, let us take a closer look at what they entail.

Hedge Funds

These are pooled funds whose investors are of high-stakes from the affluent part of the society. Hence they are willing to take major risks in order to gain more than normal returns. 

 Basically, hedge funds are for high net worth individuals or institutional investors so as to gain access to a lot of capital.

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Now, let us discuss a bit about its counterpart- mutual funds.

Mutual Funds

These are funds pooled from different sources that are invested in various financial securities like stocks and bonds. The risk and initial investment limit involve is usually low.

Due to their low-risk nature, their returns are usually less aggressive. It is often open to the general public. Also, Assets such as stocks, real estate are used by mutual funds to achieve their ideal investment strategy.

Are Hedge Funds Same as Mutual Funds?

In contrast to traditional investment firms, hedge funds seek out high-risk, high-return opportunities. However, mutual funds tend to stay in the shallows, where the returns are smaller but more consistent.

Are Hedge Funds Better Than Mutual Funds?

Mutual funds are typically viewed as more secure investments than hedge funds. This is due to the fact that fund managers are restricted in their ability to employ riskier strategies such as leverage, which can increase returns but also price fluctuations.

Hedge Funds vs Mutual Funds Performance

Hedge funds’ performance is based on the assets managed. While mutual fund performance is based on the number of investors required. Hedge funds require higher risk and returns. Mutual funds do not get as many returns as their counterpart. Hence lesser risks involved.

Similarities

These funds do not necessarily have many similarities. Let us discuss just two known facts.

Pooled Investments

Both funds are all about funds from different investors being pooled together and invested in a portfolio consisting of different securities like equity and debt.

Professional Management

Again, both funds are professionally managed by experienced fund managers who allot the funds according to market movement.

Now, to the moment we have been waiting for. Let’s go into detail about the difference between them.

What are the differences Between Hedge Funds Vs Mutual Funds?

The differences are given below. The major difference is that mutual fund is accessible to average investors.  While hedge funds are only accessible to accredited investors. 

The others are listed below

  1. Hedge funds take 20% share from the profit while mutual funds do not take share.
  2. Hedge funds are open only to high net worth(accredited) investors. Mutual funds are available to the general public.
  3. Hedge funds make high-risk investments with higher returns. While mutual funds cannot take high-risk investments.
  4. Hedge funds tend to perform better than mutual funds.
  5. Mutual fund charges management fee of 1 to 2%.  While hedge fund charges a management fee of 2% with a performance fee of 10 to 20%
  6. Hedge funds are typically more aggressive in investment.
  7. The time frame a hedge fund retains its investments can vary depending on its fund strategy, from microseconds (such as with HFT firms) to years (Global Macro). But with a mutual fund, your money is locked away for several years.

Let’s give a detailed explanation of some of these differences

Management expenses

Both these funds are managed by professionals and they also incur management expenses that are removed from the investment. However, the management expenses for mutual funds are much lesser than hedge funds. This is due to the fact hedge fund management is more complicated and a more aggressive approach is required for hedge funds.

Personal Interest

Mutual fund managers have no personal interest in the performance of the fund they are managing. on the other hand, hedge fund managers are required to invest heavily in hedge funds themselves. Hence making them more careful and make the best decisions because their own investment is at stake.

Transparency

Hedge funds are extremely private, and their performance reports are only open to the investors themselves. However mutual funds have to frequently announce annual reports and balance sheets as well as quarterly asset performance that is available to the public. 

Returns When Market Is Down

With hedge funds, the objective is to get high and steady returns notwithstanding how the market is performing. However mutual funds give great returns in a bullish market while the returns are below average in a bearish market. The disadvantage of this is that even in a bullish market where mutual funds are performing remarkably well, hedge funds will still give out steady but average numbers.

SEBI Regulations

Unlike mutual funds, hedge funds are not strictly regulated by the Security and Exchange Board of India (SEBI).

Are hedge funds only for the rich?

Hedge funds are only available to highly sophisticated investors due to a lack of regulation, making them inaccessible to the general public. A so-called “accredited investor” is a wealthy person or corporation that is assumed to be familiar with the dangers of investing in hedge funds.

Conclusion

In summary, hedge funds and mutual funds are typically not the same. Although there are some similarities, their differences surpass them.

Hedge Funds vs Mutual Funds FAQ

Which is better mutual funds or hedge funds?

The main difference between hedge funds and mutual funds is that hedge funds focus on high-risk, high-reward investments. However, mutual funds stick to the shallows where they can catch smaller but more predictable returns.

Are hedge funds riskier than mutual funds?

Managed assets are critical to the success of hedge funds. The performance of mutual funds is determined by the number of investors who must be included in the fund. Investing in hedge funds carries a higher level of risk, but it also typically yields higher returns.

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