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Difference between Mutual Fund and Hedge Fund

Definition of Hedge Fund

A private portfolio of investments that utilizes advanced investment and risk management strategies to produce good returns is known as Hedge fund. The fund provides only a limited amount of accredited investors, who merge their money with the fund manager. The fund manager invests the money in different types of assets. The fund manager debits a fee for the management of funds, which depends on the profits obtained by the assets of the fund.

A hedge fund is an investment community, where only some high net worth investors can make a purchase in the fund. The minimum amount of primary investment in the fund is moderately high. The fund is set free from strict regulations. The risk factor is very powerful in hedge funds, and that is why the fund manager practices aggressive strategies. The strategies include selling short, trading option, spending in deeply discounted securities or anticipation of a particular event, etc. However, the fund employs those financial instruments which minimize risk and improve returns.

Definition of Mutual Fund

By the term, mutual fund, we propose an investment vehicle in which some investors pool their resources for a simple goal established by the fund. The investors accumulate and pool their money with the fund manager. The fund manager use the pool of funds to spend in a diversified basket of protection in the capital market. The capital market includes bonds, stocks, and other tradable goods.

The fund manager is a portfolio specialist and views after the efficient management and control of the fund. The manager charges a fee for controlling the fund, which is based on the worth of fund’s assets.

The investors to the fund are having a controlling interest in the assets of the mutual fund. In this the part of ownership depends on the funds contributed by each investor. The return on the mutual fund depends on its performance, if the value rises, the return rises and in the reverse case, the return might fall. Net income and the capital appreciation are dispersed among the unit holder in the symmetry of their capital.

Hedge funds and mutual funds are both pooled vehicles, but there are more dissimilarities than similarities. For instance, a mutual fund is enrolled with the SEC and can be sold to an infinite number of investors.

Most hedge funds are not enrolled and can only be sold to accurately defined complex investors. Usually, a hedge fund will have a peak of either 100 or 500 investors. Mutual funds may circulate freely; hedge funds may not.

Other differences include:

Flexibility – the hedge fund manager has some constraints to deal with; he can use derivatives, trade short, and use leverage. He can also create significant changes to the strategy if he believes it is appropriate. The mutual fund manager cannot be as adjustable. If he adjusts his strategy, he will be blamed of style drift.

Paperwork – a mutual fund is proposed via a prospectus; a hedge fund is offered via the private employment memorandum.

Liquidity – the mutual fund often allows daily liquidity you can withdraw at any time, the hedge fund usually has some lockup provision. You can only get your money periodically.

Absolute vs. Relative – the hedge fund endeavors for absolute return it wants to produce decisive returns despite of what the market is doing. The mutual fund is normally managed about an index benchmark and is judged on its deviation from that benchmark.

Self-Investment – the hedge fund manager is expected to put some of his capital at risk in the strategy. If he does not, it can be described as a bad sign. The mutual fund does not face this same expectation.