Difference Between Hedge Fund vs Mutual Fund
A hedge fund is an investment partnership which maintains a portfolio of investments to generate returns through advanced investment and risk management strategies. The fund raises capital through private placement and pools the money of a few qualified wealthy investors along with the fund manager’s money. The minimum investment levels are generally very high; hence it is not meant for small retail investors.
A mutual fund is an investment vehicle wherein a large number of investors pool their money for exploiting the benefits of diversification and expert fund management. The minimum investment levels are usually very low and affordable for the retail investors with limited disposable income. The fund manager uses the pooled resources to invest in a diversified basket of tradable securities in a capital market like stocks, bonds, money market instruments etc. for a common goal.
Mutual funds are strictly regulated and cannot deviate from their goal or their ambit of allowable strategies/securities. Hedge funds are not strictly regulated and hence can be managed very aggressively for generating high returns. A risk factor is also very high for these funds since a range of strategies like short selling of securities, trading in complex derivative instruments, investment in deep discount securities, using leverage (borrowing) to increase returns etc. are undertaken to enhance returns. Let us look at Hedge Fund vs Mutual Fund in detailed in this post.
Hedge Fund vs Mutual Fund Infographics
Below is the top 9 difference between Hedge Fund and Mutual Fund
A key difference between Hedge Fund vs Mutual Fund
Below is the list of points describe the difference between Hedge Fund and Mutual Fund
- While hedge fund is an investment partnership consolidating funds from few established investors who could be high net worth individuals (HNIs), pension funds, endowment funds etc., mutual funds are investment vehicles pooling money from several retail investors who seek diversification of their investment and professional management of their funds for generating higher returns at lower risk
- Hedge funds are characterized by the small number of large investments which could be minimum Rs 1 crore for each investor while mutual funds constitute a large number of small investments which could be as low as Rs 500 for an investor
- The goal of a hedge fund is to maximize returns from the investment while the goal of the mutual fund is to generate returns over and above the risk-free rate of return/benchmark returns
- Hedge fund managers hold a substantial share of the fund through their investment while mutual fund managers are not mandatorily required to invest in the fund
- Hedge funds are virtually unregulated and hence can pursue a wide range of high-risk strategies without any requirement for public disclosure of information. Mutual funds are heavily regulated with investor safety being the most important requirement, hence these funds need to pursue strategies within the set objectives and ensure regular public disclosure of performance
- Hedge fund management fees are based on a performance of assets and usually work on 2/20 basis comprising 2% charge as annual management fees and 20% of net profits. Hedge fund managers do not share the losses. For mutual funds, management fees are based on a percentage of assets managed
- Hedge fund investments usually have a lock-in period of 3 years subsequent to which redemption is made in blocks. Most Mutual fund investments (open-ended funds) can be easily redeemed with a much lower lock-in period, hence they are comparatively more liquid instruments
- Mutual funds need to be publicly priced (Net asset value) on a daily basis and must furnish quarterly disclosure of asset allocation while hedge fund has no such obligations
- Hedge funds can selectively make their private placement memorandum available to potential investors while mutual funds must make their prospectus available on request
Head To Head Comparison Between Hedge Fund vs Mutual Fund
Below is the Topmost comparison between Hedge Fund vs Mutual Fund
|The Basis Of Comparison Between Hedge Fund vs Mutual Fund||Hedge Fund||Mutual Fund|
|Meaning||Investment partnership between few established investors who pool in a large amount of money for high risk, a high return investments||Investment vehicle which pools savings of retail investors for diversified investment by the professional fund manager|
|Investors/Owners||Few qualified investors, a number ranging from 100 to 500||Thousands of small and retail investors with limited disposable income|
|Minimum investment||Very large||Comparatively much smaller|
|Management Style||Highly aggressive involving advanced strategies, hence returns and risks are very high||Less aggressive management, hence returns and risks are comparatively much lower|
|Flexibility||Manager can make significant changes in strategies as he deems fit, can sell short, use arbitrage, derivatives, leverage etc.||The manager has to adhere to the strategy adopted at initiation|
|Management fess||More expensive||Comparatively less expensive|
|Regulation||Lightly regulated||Strictly regulated|
|Transparency||Limited, Information disclosure only to the investor’s||Public disclosure of results mandatorily required on a regular basis|
|A contribution of fund manager||Mandatory, a substantial investment made by fund manager||Not mandatory|
Hedge Fund vs Mutual Fund – Final Thoughts
Both Hedge Fund vs Mutual Fund are investment vehicles involving many investors who pool their money to be managed professionally and invested in a portfolio of investments. Save this one similarity between Hedge Fund vs Mutual Fund, these funds differ in every other aspect owing to the difference in pace and strategies adopted. Unlike mutual Funds, hedge funds involve large minimum investments and are open to only accredited investors who have a high net worth of more than $1.5 million or income of more than $200,000 annually. Being virtually unregulated, they can borrow any amount to bet big and enhance their returns. Hedge funds can invest in any stock class including highly risky or speculative asset classes which are prohibited for mutual funds like packaged sub-prime mortgages. Hedge funds can also invest in highly concentrated portfolios, unlike mutual funds which need to stay diversified to protect investors’ investment. Owing to this highly aggressive management style in case of hedge funds, returns generated are much higher as compared to mutual funds even during bear phases.
Thus hedge funds are affordable and feasible only for the financially well-off who are aggressive risk seekers. Since deposit level, risk level and expense ratio are much higher with low liquidity and transparency, first-time depositors are usually advised to stay away from these funds until they have gained experience in the investment field. In contrast, mutual funds are targeted towards retail investors who are comparatively risk-averse but like to see their money grow over a long-term period.
So, if you have limited resources or a first-time depositor, you should go for a mutual fund. If you are wealthy enough to qualify for a hedge fund, have considerable experience in investments and like to take a risk, you can invest in a hedge fund.
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This has a been a guide to the top difference between Hedge Fund vs Mutual Fund. Here we also discuss the Hedge Fund vs Mutual Fund key differences with infographics, and comparison table. You may also have a look at the following articles –