Hedge Funds vs Mutual Funds: What Are The Key Differences?

When comparing hedge funds vs mutual funds, there are a number of similarities and differences to take note of. Despite the fact that both appear similar on the surface, from an investment point of view there are multiple key differences that must be taken into consideration.

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The Similarities

The primary similarity between hedge funds and mutual funds is that both are managed portfolios. In short, this means that a manager or group of managers selects investments and adds them to a single portfolio.

Image: Warren Buffett

With both hedge funds and mutual funds, portions of the fund are sold to investors who are then in position to take advantage of any gains while also dealing with losses associated with the holdings.

With both hedge funds and mutual funds, the primary benefit is that investors are able to diversify their investments while receiving professional management from those who are known to provide above average performance.

The Differences

Hedge funds are managed in a more aggressive manner than mutual funds. From the ability to short sell stocks to taking positions in options, hedge fund managers are aggressive as they attempt to generate the best gains possible for clients.

With an aggressive stance, hedge funds are in better position to earn money even when the market is dropping.

On the other side of things, mutual funds are not permitted to take on such risk, making this the safer of the two options. Safer also means less chance for a really big return.

Another difference worth noting is availability. Mutual funds are simple to purchase with a minimal investment. This is something an “average” investor can easily get involved with.

Hedge funds, however, are only made available to individuals with a high net worth, and the AUM figure-to-client ratios of funds like David Tepper or George Soros.

Note: while most individual investors will never have the chance to directly invest in a hedge fund, they can still track the results and invest accordingly.

Regulation of Hedge Funds vs Mutual Funds

The regulation of mutual funds, as compared to hedge funds, should also be noted.

Mutual funds are highly regulated, making it difficult for these to outperform the market or perform well during a downturn in the market.

Hedge funds are not regulated, allowing managers to be more aggressive with their strategies, and as mentioned above, beat the market even during a downturn.

Investors who are risk averse often times opt for mutual funds, as opposed to any other option, due to the fact that these are subjected to a high degree of regulation.

When comparing hedge funds vs mutual funds, pay attention to both the similarities and differences. There are many to take note of, with each one allowing the investor to better determine what is best for them moving forward.

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