Differences Between Hedge Funds and Mutual Funds

Hedge Funds vs. Mutual Funds

I saw a question within another online hedge fund community regarding the differences between hedge funds and mutual funds and figured I would copy my answer to the individual here in my hedge fund blog. For those of you in the hedge fund industry this is obvious stuff so please just let me know if I missed something glaring.



Mutual Funds

• Their performance is marked against a relevant benchmark which they try to beat in up years with superior performance and protect their investors with less losses in bad years- Pooled investment vehicle similar to a hedge fund.
• They can use some securities that have returns traditionally uncorrelated with the overall market but in general they are limited to stocks, money market accounts, and bonds
• Anyone can invest in mutual funds
• Mutual funds calculate the price of their vehicle daily based on the number of investors and the market-rate or cost for a mutual fund goes up as it becomes more popular- You can find mutual fund of fund products and they have been rising in popularity in the past 5 years- Average cost of a mutual fund is 75 basis points or .75% per year
  

Hedge Funds

• Contrary to what Investopedia will tell you hedge funds do not always invest in publicly traded securities. They often invest in art, futures, PIPE deals, real estate and other investment vehicles that aren't highly correlated to the general market.
• Depending on who you ask there are around 12-14,000 hedge funds competing against each other- Hedge fund have developed (the media has developed) an image of hedge funds as being ultra risky employing dangerous levels of leverage- Hedge funds may invest in art, website domain names, stocks, bonds, options, futures, Foreign Exchange, or wind power farms
• Hedge funds manage their portfolios aiming for absolute growth targets and they don't usually compare themselves against any stock exchange-based benchmark such as the S & P 500 or Russell 3000
• Most hedge funds are attempting to invest their money that is uncorrelated with the overall market
  
• You have to be an accredited investor (if you live in America. This means meeting high net worth standards) to invest in a hedge fund or hedge fund of fund product- There are several hedge fund of funds. These are investment vehicles that invest in other hedge funds. This way if someone has $2M to invest they can place it into a hedge fund of fund and they will create a portfolio for your funds so that it fits your specific appetite for risk- While fees are starting to come down the average hedge fund manager charges a 2% base fee and a 20% performance fee. Note: America is one of the only places where you have to be an accredited investor to invest in hedge funds.
  

- Richard

Richard C. Wilson

Richard@RichardCWilson.com

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