What is the Difference Between a Hedge Fund and a Mutual Fund?

 

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Many people are familiar with the idea of a mutual fund. A mutual fund manager handles the portfolio for a large group of clients. Investors can choose to buy into the investment portfolio created by the mutual fund manager.

A hedge fund works in a similar way, with several differences. When it comes to investing your money, you should always explore all your options. Here, we are going to take a look at the differences between investing in a mutual fund and investing in a hedge fund.

Mutual Funds are Highly Regulated

900-Hot_Cheap_StocksMutual funds are regulated by the SEC (the Securities and Exchange Commission). Since hedge funds are not required to follow the same regulations, hedge fund managers are able to invest in more securities than mutual funds. In general, mutual funds and hedge funds invest in stocks, bonds, and commodities.

One of the differences between these two types of funds is that hedge funds are free to invest in more risky investments. These risky investment could result in more substantial gains in your portfolio, but they could also lead to major losses. You need to be prepared for the worst to happen when you invest money, so carefully consider your options before investing any of your finances in the stock market.

Selling Shares

Mutual funds have a value that is determined each day, so if an investor wishes to sell some of their shares, they can do so. This is part of the regulations imposed by the SEC. In contrast, most hedge funds have a locked period where investors are unable to sell their shares.

This is due to the fact that hedge fund managers often have a specific period in mind for each investment. Hedge fund managers employ a variety of strategies that require long-term planning, making it difficult to deal with the selling and buying of shares during certain periods of time.

Hedge Funds Often Use Leverage

stock-featLeverage is technique that is used by hedge fund managers to increase potential returns; though, it also comes with greater risks. Leverage is the process of using borrowed money to purchase securities. They also deal in derivatives, which are basically contracts to trade a specific security at a fixed price. Some of the techniques used by hedge fund managers are considered risky, but they can also include a better payoff.

 

Fees are Collected Differently

Mutual fund managers receive compensation that is set ahead of time. Whether the fund is successful or loses money, the mutual fund manager receives the same compensation. Hedge fund managers earn compensation based on the actual performance of the fund.

If the fund does well, they earn more, giving them more incentive to ensure their plan is successful. Additionally, hedge fund managers receive a smaller management fee.

Mutual funds continue to be the preferred choice of most individual investors, with interest in hedge funds constantly shifting every few years. While hedge funds are not regulated by the SEC, there are laws the place specific requirements on hedge fund managers.

They must be accredited and possess a net worth of at least one million dollars. They also have to meet a specific minimum yearly income and have a certain amount of investment experience.

In the end, the choice is yours to make, between choosing a hedge fund and a mutual fund. They both have their advantages and disadvantages when compared to each other. Mutual funds are more secure with less potential for earnings while hedge funds can be riskier but with a higher reward.

If you are interested in learning more about hedge funds, the stock market, or finances, contact us today and start building a more secure future.