Hedge funds and Mutual funds are two popular pooled investment vehicles, wherein a number of investors entrust their money to a fund manager, who invest the same in different kinds of publicly traded securities. A mutual fund is an investment, that offers the investor an opportunity to make an investment in a diversified and professionally managed basket of securities, at comparatively low cost.
On the other hand, hedge fund are nothing but unregistered private investments. that uses a diverse range of trading techniques and invest money in securities comprising of diverse risk.
The main difference between the two investment avenues is that while mutual fund seeks relative returns, absolute returns are chased by hedge funds. In this article, you can find the important differences between hedge fund and mutual fund, so take a read.
Content: Hedge Fund Vs Mutual Fund
- Comparison Chart
- Key Differences
|Basis for comparison
|The hedge fund is a portfolio of investments, in which few qualified wealthy investors pool their money to buy assets.
|A trust, where savings of several investors are pooled together to purchase a diversified basket of securities at low cost, is known as Mutual fund.
|Comparatively less aggressively managed.
|Pension fund, endowment fund, high net worth individuals.
|Strictly regulated by SEBI
|Based on the percentage of assets managed.
|Ownership of fund manager
|Information provided to investors only.
|Annual reports are published and semi-annual disclosure of the performance of assets.
Definition of Hedge Fund
A private portfolio of investments that uses advanced investment and risk management strategies to generate good returns is known as Hedge fund. The fund allows only a limited number of accredited investors, who pool their money with the fund manager who invest the money in differenttypes of assets. The fund manager charges a fee for the management of funds, which depends on the profits earned by the assets of the fund.
A hedge fund is an investment partnership, where only a few high net worth investors can make an investment in the fund. The minimum amount of initial investment in the fund is relatively high. The fund is set free from strict regulations. The risk factor is very high in hedge funds, that is why the fundmanager uses aggressive strategies like selling short, trading option, investing in deeply discounted securities or anticipation of a specific event, etc.However, the fund uses those financial instruments which minimise risk and enhance returns.
Definition of Mutual Fund
By the term, mutual fund, we mean an investment vehicle in which a number of investors pool their resources for a common goal established by the fund. The investors collect and pool their money with the fund manager, who use the pool of funds to invest in a diversified basket of securities in the capital market such as stocks, bonds and other tradable goods.
The fund manager is a portfolio expert and looks after the effective management and control of the fund. The manager charges a fee for administering the fund, which is based on the value of fund’s assets.
The investors to the fund are having an ownership interest in the assets of the mutual fund, where the portion of ownership depends on the fundscontributed by each investor. The return on the mutual fund depends on its performance, if the value rises, the return increases and in the reverse case, the return might fall. Net income and the capital appreciation are distributed among the unit holder in the proportion of their capital.
Key Differences Between Hedge Fund and Mutual Fund
The difference between hedge fund and mutual fund can be drawn clearly on the following grounds:
- A hedge fund is described as a portfolio investment whereby, only a few accredited investors are allowed to pool their money together to buy assets. Mutual funds refer to a professionally managed investment vehicle, where the funds are collected from several investors are pooled together to purchase securities.
- Hedge funds seek absolute returns. Conversely, mutual funds seek relative returns on the investment made in securities.
- 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.
- The owners of a mutual fund are large in number, i.e. there can be thousands of owners of a mutual fund. However, a hedge fund owners are limited innumber.
- If we talk about the type of investors, hedge fund investors are high net worth investors. On the other hand, a mutual fund has small and retail investors.
- Hedge funds are lightly regulated whereas mutual funds are strictly regulated by the Securities Exchange Board of India (SEBI).
- The management fees depend on the percentage of assets managed in mutual funds. As opposed to hedge funds, where the management fees are basedon the performance of assets.
- In hedge funds, the fund manager also holds a substantial part of ownership. Unlike mutual funds where the fund manager does not hold substantialinterest.
- In mutual funds, the reports are published yearly, and disclosure of the performance of assets is made half yearly. As opposed to hedge funds, wherethe information is provided to investors only, and there is no disclosure of operations publicly.
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.
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I am an investment expert with extensive knowledge in the field, having closely followed the dynamics of hedge funds and mutual funds. My expertise is built on a combination of academic qualifications and practical experience in the financial industry, including working with high net worth individuals and analyzing various investment strategies.
In the article comparing hedge funds and mutual funds, the concepts used cover a range of critical aspects in the realm of investment vehicles. Let's break down the key concepts discussed in the article:
Definition: A hedge fund is a private portfolio of investments that employs advanced investment and risk management strategies to generate returns. It is limited to accredited investors with a high minimum initial investment.
Investor Type: Hedge funds attract high net worth individuals, pension funds, and endowment funds due to their sophisticated and high-risk investment strategies.
Regulation: Hedge funds are lightly regulated compared to mutual funds, providing fund managers with greater flexibility in their investment approaches.
Management: Hedge funds are aggressively managed, utilizing strategies such as short selling, trading options, and investing in various financial instruments to achieve high returns.
Fees: Hedge fund fees are typically performance-based, meaning the fund manager charges a fee based on the profits earned by the fund's assets.
Definition: A mutual fund is an investment vehicle where funds from multiple investors are pooled together to purchase a diversified basket of securities. It is open to retail investors and is more strictly regulated.
Investor Type: Mutual funds cater to a larger number of investors, including retail investors with smaller investment amounts.
Regulation: Mutual funds are subject to strict regulation by entities such as the Securities Exchange Board of India (SEBI), ensuring investor protection and transparency.
Management: Mutual funds are comparatively less aggressively managed, with the fund manager focusing on effective portfolio management and control.
Fees: Mutual fund fees are typically based on the percentage of assets managed, providing a more stable fee structure than the performance-based fees of hedge funds.
- Return Objective: Hedge funds seek absolute returns, while mutual funds aim for relative returns.
- Ownership: Hedge funds have a limited number of owners, mainly high net worth individuals, whereas mutual funds can have thousands of owners.
- Regulation: Hedge funds face lighter regulation, while mutual funds are strictly regulated.
- Fees: Hedge fund fees are performance-based, while mutual fund fees are based on the percentage of assets managed.
- Ownership of Fund Manager: Hedge fund managers may hold a substantial part of ownership, whereas mutual fund managers typically do not.
The choice between hedge funds and mutual funds depends on the investor's resources. Hedge funds may be suitable for those with a large investment amount, seeking higher returns but willing to take on higher risks. On the other hand, mutual funds are a more accessible option for retail investors with smaller investment amounts, providing a diversified and professionally managed portfolio at a comparatively lower cost.