Mutual Funds and Hedge Funds: What’s the Deal?

Posted on: April 28th, 2010 by

Investment Management - Financial Planning - Rockville, MDBoth mutual funds and hedge funds are managed portfolios, meaning that an investment manager picks the securities he or she thinks will perform well and groups them into a single portfolio.   Portions of the fund are then sold to investors who can participate in the gains/losses of the holdings.  The main advantage to investors is that they get instant diversification and professional financial management of their money.

Hedge funds, however, are managed much more aggressively than mutual funds.  They are able to take speculative positions in derivative securities such as options and have the ability to short sell stocks.  This will typically increase the leverage, therefor increasing the risk.  This also means that hedge funds have the ability to continue to make money when the market is failing.  Mutual funds, on the other hand, are not permitted to take these highly leveraged positions and are typically safer as a result.

Another big difference between these two funds is their availability.  Hedge funds are only available to a specific group of sophisticated investors with high net worth.  The government deems this group as “accredited investors”, and the criteria for becoming an accredited investor are quite lengthy and restrictive.  Mutual funds are very easy to purchase with any amount of money though.



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