Hedge funds and Mutual funds are two known reserved investment vehicles, wherein funds are collected from a number of investors who are willing to pool their money together to a fund manager, which thereof is invested in various types of securities.
A mutualfund is an investment, where investors try to make an investment in a diversified portfolio to lower the risk factor and increase the returns generated at a lower cost. Whereas, a hedge fund is private investments that are not registered, also uses a wide range of strategies and techniques and thereby invest money into securities with multiple risks.
The major difference between these two funds lies between the returns. A hedge fund provides certain returns and mutual funds are expected to provide relative returns. However, a thorough difference between these two is discussed below:
What is a Hedge Fund?
A hedge fund is a portfolio of investments, wherein advanced investment and risk management strategies are undertaken to improve the chances of higher returns. In a hedge fund, only a few approved investors pool their money, which is collected by a fund manager, who thereby use that money to invest in various kinds of assets. An amount of fee that is based on the profit accumulated on the assets of funds, is charged by the fund manager to perform the services like management of funds.
A hedge fund is considered as an investment partnership where only a few wealthy investors invest in the fund. In a hedge fund, the minimum amount for the first investment in the fund is set high and thus only a few investors invest. The fund does not face any rigid rules or regulations. Also, the risk affiliated with these funds is comparatively higher which forces the fund manager to opt for aggressive strategies such as selling short, trading option, investment in discounted securities and more. However, the financial instruments that hold less risk and better returns are equipped by these funds.
What is a Mutual Fund?
A mutual fund is an investment vehicle that constitutes a pool of money collected from various investors in order to invest in securities such as stocks, bonds, money market instruments, and other assets. This helps in increasing the buying power of investors and eventually leading to diversified portfolios. Investors are able to buy a number of securities at a much lower price than investing in individual securities.
Fund manager collects the investors’ money and is a portfolio expert. A fund manager usually manages and controls the fund, for which a small amount of fee is charged, as per the value of assets of funds.
The investors investing in mutual funds usually seek ownership rights in the assets, the portion of ownership is based on the funds contributed by each investor. The return on investments varies according to the performance of mutual funds, such as if the value of funds rises, the returns will also increase. Whereas, if the value of the funds faces a downfall, so will the returns on the investments. The proportion of the capital of unit holder decides the net income and capital appreciation and the amount they will be distributed in.
Key Differences between Hedge Fund and Mutual Fund
The management fees in hedge funds are entirely based on the performance of assets as contrary to mutual funds, where
The difference can be studied in brief through the following table:
| Meaning | A portfolio of investments pooled by the money of wealthy investors in order to buy assets is known as a Hedge fund. | A mutual fund is an investment vehicle that constitutes a pool of money collected from various investors in order to purchase securities such as stocks bonds etc. at a lower rate. |
| Return | Absolute | Relative |
| Management | Aggressively managed. | Less aggressively managed when compared to hedge funds. |
| Owners | Few | Thousands |
| Investor type | Pension fund, endowment fund, and high net worth individuals. | Retail investors |
| Regulation | Less regulation | Strictly regulated by SEBI |
| Fees | Based on Performance | Based on the percentage amount of assets managed |
| Ownership of fund manager | Substantial | Not-substantial |
| Transparency | Only Investors get access to information | Access to annual reports and semi-annual reports of the performance of assets |
Conclusion
Hedge funds and mutual funds, both have their own benefits and downsides but selection between these two depends on the capital held. Investors should make choice between these two funds based on their financial resources and requirements. Investors with a large amount of money should opt for hedge funds whereas mutual funds can be selected if resources are less and are willing to generate higher returns.