Elucidating the distinction between hedge funds and mutual funds

Written by admin on April 25th, 2011

Investment vehicles are of various types of which mutual funds are perhaps the most popular. However, people are increasingly becoming aware of the specialty investment vehicles, hedge funds. How do these differ from the conventional mutual funds? If you have no idea, it is better to get a good understanding of the distinction.

Ample promotion of mutual funds via advertisements helps to let people know about it. On the other hand, a hedge fund has restrictions on advertisements, and therefore, only the niche investors know of it. You can get the former from a prospectus while the latter is offered by private placement memo only.

Here are a few basic differences between the two types of investment schemes.

Nature – The mutual funds are investment vehicles registered to the SEC and need to adhere to all its rules and regulations. A hedge fund operating in New York is a private investment vehicle. Therefore, no strict regulations bind its management. Initial investments for mutual funds are smaller in amount than that of specialty funds.

Performance – While the performance of a general fund is assessed based on relative index, this is not so for the limited fund. Even when the relative index is down, hedge funds of New York are supposed to deliver absolute returns. The difference in strategies is what makes this kind of performance possible.

Strategies – Mutual fund utilizes relatively inflexible strategies; this gives a New York Hedge Fund an edge over it. The specialty investment vehicles can use strategies like leverage, short selling, derivatives, etc extensively. This is not the case with general funds, even if they can use some of the techniques there is a limit on it.

Investor – Any entity can invest in a mutual fund. This is not the case with a hedge fund. You have to be an accredited investor or qualified purchaser to be eligible for it. You have a net worth in millions, earn millions, own a business worth millions or hold assets in millions – only these make you eligible for becoming an investor.

Manager – The manager of a general investment fund does not invest his/her own capital while one of the specialty investment funds does. Moreover, in case of a mutual fund, the manager gets a salary and bonus, while a hedge fund manager gets a fixed fee and an incentive as per the profits from the fund.

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