Welcome to the Topic “Hedge fund vs Mutual fund”
Mutual funds and hedge funds are both managed portfolios made up of pooled funds with the purpose of achieving diversification and thus higher returns. This means that a manager—or a group of managers—invests in assets that meet a specified strategy using investment cash from many investors.
Institutional fund managers offer a variety of mutual fund solutions for retail and institutional clients. Hedge funds are aimed towards high-net-worth individuals. These funds require accredited investors to meet certain criteria.
Mutual Funds (MFs)
In the investment world, mutual funds are well-known. MFS Investment Management launched the first mutual fund in 1924 and marketed it to the public. Since then, mutual funds have grown significantly to give investors a diverse selection of passive and active managed investment options.
Investors can invest in a passive fund to gain low-cost market exposure by investing in an index. Active funds are a type of investment that benefits from professional portfolio fund management. According to the Investment Company Institute (ICI), there were 7,945 mutual funds with $21.3 trillion in assets under management as of December 31, 2019. (AUM).
The Securities and Exchange Commission regulates mutual funds under two regulatory directives: the Securities Act of 1933 and the Investment Company Act of 1940. The 1933 legislation requires a recorded prospectus for investor education and transparency.
Both open-end and closed-end mutual funds trade daily on the financial market exchanges. An open-end fund has various share classes with varying fees and sales loads. These funds are priced at their net asset value at the end of each trading day (NAV).
In an initial public offering, closed-end funds offer a set number of shares (IPO). They are traded like stocks throughout the day. Investors of various categories can benefit from mutual funds. However, some funds may require a minimum commitment of $250 to $3,000 or more, depending on the fund.
Mutual funds, in general, are managed to trade securities according to a set of rules. While the sophistication of the approach varies, most mutual funds do not rely extensively on alternative investments or derivatives. The usage of these high-risk assets is limited, making them more accessible to the general people.
Hedge Funds
Hedge funds and mutual funds share the same basic pooled fund structure. On the other hand, Hedge funds are exclusively available on a private basis. Typically, they are recognized for adopting higher-risk positions to maximize investor returns. As a result, they may employ methods such as options, leverage, short-selling, and others. Hedge funds, on average, are managed far more aggressively than their mutual fund equivalents. Many people want to take global cyclical bets or profit from declining markets.
While based on the same investing principles as mutual funds, Hedge funds are structured and regulated very differently. Because hedge funds make their investments in private, they must only accept accredited investors, which allows them to develop their fund structure. Regulation D of the 1933 act requires authorized investors to invest in private hedge funds.
Accredited investors are thought to have a deeper understanding of financial markets and a higher risk tolerance than regular investors. For the chance to possibly earn larger profits, many investors are ready to forego the customary protections granted to mutual fund participants. Hedge funds differ from other private funds in that they often use a tiered partnership structure with a general partner and limited partners.
Party Investors 