Mutual funds and hedge funds are both managed strategies made up of pooled funds with the purpose of creating diversification and thus higher returns. This suggests that a manager—or a group of managers—invests in assets that meet a specified plan using investment money from many investors. However, most investor don’t know the difference and search for Hedge fund vs Mutual fund.
However, to know the difference between Hedge fund and Mutual fund let’s discuss them in detail.
Table of Contents
What is a Hedge Fund?
Hedge funds are a type of innovative investment that uses collective funds to gain aggressive profits, or alpha, for their clients. Hedge funds can be proactively handled or utilize derivatives and leverage to generate significant profits in both domestic and global markets (either in general terms or in comparison to a specific market benchmark).
Hedge funds are often only available to qualified investors since they are subject to fewer restrictions than other funds. One feature that differentiates the hedge fund business from mutual funds and other financial assets is that hedge funds are subject to fewer regulations.
What is a Mutual Fund?
A mutual fund is a form of financial tool that invests in assets such as shares, bonds, money market tools and other valuables by collecting money from multiple investors.
Qualified investment managers manage mutual funds, allocating assets and attempting to generate higher returns or profit for the fund’s investors. The portfolio of a mutual fund is built and managed to meet the financial goals indicated in the proposal.
Mutual funds provide entry to professionally handled baskets of shares, bonds, and other assets to small and independent investors. As a result, each stakeholder shares in the fund’s profits and losses equally.
Key Takeaway
- Mutual funds are licensed financial programs that are accessible for trading to the general public.
- Hedge funds are a type of private venture offered only to High net worth investors and Big Investors.
- Hedge funds are recognized for taking on higher-risk investments in order to enhance profits for their customers.
- Ultimately, it is important for hedge fund investors to properly know the strategy risks and governing parameters of a fund. Unlike a mutual fund prospectus, these conditions are not publicly disclosed. To control their activity, hedge funds use private placement affidavits, a limited partnership or operating agreement, and membership documents.
Hedge Fund vs Mutual Fund
Here are the major Difference between Mutual Fund and Hedge fund :
| Basis | Hedge Fund | Mutual Fund |
| Profit sharing | Take 20% as a performance fee. | Don’t take a percentage of the profits. |
| Access | Only high-net-worth and skilled investors | The general public has access to them. |
| Fee | Charge management fee (often 2%) | Charge a maintenance fee ( 1 or 2%). |
| High Risk | Make high-risk investments. | Unable to make high-risk investments. |
| Track Record | Better track record than mutual funds. | Poorer track record than hedge funds. |
| Regulations | Nominal to No regulations. | Strictly regulated by the government. |
| Investment | They can invest anywhere they want. | They can only invest in Stocks and bonds. |
| Holding Period | Microseconds to years | Mostly long term Expect Some SIP |
Difference between Mutual Fund and Hedge fund
Here are the major Difference between mutual fund and hedge fund (Hedge fund vs Mutual fund):
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Investment Strategy
Hedge funds are often more risky than mutual funds. While hedge funds’ investment techniques differ, they all strive to make a profit irrespective of whether the market is rising or falling.
Hedge fund managers can achieve this goal by applying high-risk strategies including short selling equities and taking speculative holdings in derivative instruments.
Mutual funds, on the other hand, are unable to assume such highly indebted strategies, which makes them less risky but also limits their eventual rewards.
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Investors
Only experienced and high-net-worth individuals (‘accredited investors’) can actually invest in hedge funds. These are often investors with a net worth of more than 20 Crores (except their principal house) or an annual income of more than 2-3 crore for the last two years (the levels vary from nation to nation).
As a result, the required minimum levels for hedge fund participation are often much greater. This is not the case with mutual funds, which are available to retail investors and frequently have relatively low investment requirements.
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Investment
Hedge funds can trade in everything they want, including shares and derivatives, land, real estate, cryptocurrency, public bonds, life insurance, lottery tickets, and even a mine on the other side of the globe.
Mutual funds, on the other hand, are restricted to investing in publicly traded assets such as stocks and/or bonds.
Charges and Fees
Hedge funds impose both a set management fee (usually set at 2% ) and a performance premium (often ranging from 10% to 30% ), implying that the better the fund succeeds, the more you will pay as an investor.
Many investors are put off by this arrangement since the fund manager receives the asset management charge – which may be in the millions of dollars – regardless of how well the fund executes.
Nevertheless, it’s important to note that part of the logic here is that hedge fund managers typically put their own capital into the system, which assists connecting their interests with those of a successful fund. Mutual funds only levy a management fee, which is normally between 1 and 2%.
Holding period difference between hedge fund and mutual fund
The time a hedge fund keeps its assets can range from microseconds to years, based on the fund’s approach. Your money is trapped for several years in a mutual fund (Expect SIP Investment).
Regulations of Mutual Fund vs Hedge Fund
The quantity of cash that can be allocated, the time period in which returns should be invested, and the entire investment plan are all carefully regulated in mutual funds according to SEBI guidelines.
There are no such restrictions that apply to hedge funds. This is one of the reasons why there are so many restrictions on who can invest in hedge funds in the first spot.
Risk of Hedge Fund vs Mutual Fund
Hedge Funds are quite risky. Your money can give you double or triple returns in some time and you can lose your full money as well.
Mutual funds are quite a safe option in comparison to Hedge funds as they only invest in public traded companies and bonds.
Conclusion
Hedge funds go after the big fish, which are high-risk, high-reward investments. Mutual funds, on the other side, stay in the shallows, catching smaller but more consistent returns.
This is all from our side regarding Hedge fund vs Mutual fund. Although, if you have any doubts about difference between hedge fund and mutual fund, you can just comment below.
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Hedge fund meaning
Hedge funds are a type of innovative investment that uses collective funds to gain aggressive profits, or alpha, for their clients. Hedge funds can be proactively handled or utilize derivatives and leverage to generate significant profits in both domestic and global markets
What is a hedge fund?
Hedge funds are a type of innovative investment that uses collective funds to gain aggressive profits, or alpha, for their clients.They can be proactively handled or utilize derivatives and leverage to generate significant profits in both domestic and global markets
How to invest in a hedge fund?
To invest in a Hedge Fund you must come under the HNI category. Hedge funds are not available for General public.
Hedge funds in India
Best hedge funds in India are Indea Capital Pte Ltd., India Capital Fund, India Deep Value Fund, Absolute India Fund (AIF), Fair Value.
How to start a hedge fund?
You need to Establish company and register it in India to start a hedge fund. You also need to meet the criteria of the Indian government.
