Being an investor, sometimes you may want to know the simple difference between Mutual Funds and Hedge Funds. First of all, both the funds are nothing but managed portfolios. Some one (manager) will pick up the securities that might perform well in future and groups them into a single portfolio. Then investors can actually buy portions of the fund in order to bear losses/gains of that fund.
Now, what does the word hedge mean? We hear this word a lot now days. Terms like hedging, hedge funds have been already part of our vocabularies. For example: most of the big IT companies in India do hedging against the depreciating US $ to increase their profit margins. Basically, hedge means insurance against the bad times or defensive management. Now, the basic differences between mutual fund and hedge funds are:
1. Anybody can invest in mutual funds. The hedge funds are available to only accredited investors. For example: having net worth more that few millions etc. Also, they rarely have more that 500 investors each in hedge fund.
2. Hedge funds are managed more aggressively and the managers can do the short sell of stocks. On this track, mutual funds are more secure.
3. Mutual funds typically adhere to regulations like SEC(in US) and SEBI(in India) for example. The hedge funds are not regulated.
4. Mutual Funds change less fees and also as decided by the regulatory body. Where as hedge funds charge more fees like 1-2% of asset value + percentage of profit etc.
5. Traditional mutual funds generally rely on stock markets to go up but for hedge funds this is not the case. It makes no difference if market goes up or down.
Cheers,
Amol
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