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How do Hedge Funds differ from Mutual Funds?

Home » Investing » Hedge Funds » How do Hedge Funds differ from Mutual Funds?

  • Investment Strategy: Mutual funds are highly regulated, so their investment approaches are limited in comparison with a hedge fund. As a result, investment approaches differ significantly between mutual and hedge funds. Mutual fund managers invest in a particular stock because they expect the value of that stock to increase. In such circumstances the mutual fund managers measure their success against certain industry benchmarks, and such success is partially dependent upon the rise or fall of the stock market within a given year. In contrast, short-selling is one of the favored techniques of hedge fund managers. Short-selling involves the identification of a stock that is likely to lose value in the near future. Stocks are borrowed and sold, then replaced with stocks purchased at the new, lower price. Hedge funds can thus perform well even in a down market because of the greater number of available investment strategies, but as a general rule they are also less safe than mutual funds.
  • Privacy: Because of the level of regulation on mutual funds, mutual fund managers are required to make numerous disclosures to the public about the operation and success of each fund. Hedge funds, on the other hand, are not required to disclose their activities to third parties. Of course, such privacy makes it difficult for investors to easily identify successful hedge funds, which in turn increases the risk in a hedge fund investment.
  • Number of Investors: The pool of investors in a mutual fund is generally quite large, but precisely the opposite is true in hedge funds. It is not unusual for a hedge fund to possess less than 100 investors, since 99 or fewer investors is required for the regulatory exemption, and it’s very uncommon for a hedge fund to possess more than 500 investors. The small investor pool results in part from the inability of hedge funds to advertise or make offers to the general public. Additionally, the requirements for investment in a hedge fund (discussed in greater detail below) are significantly more stringent than those of a mutual fund, and minimum investment in a hedge fund is substantially greater than in a mutual fund.



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