Mutual Fund vs Hedge Fund

Once you have some money that you want to invest into something you might face an option of whether to put your money into a Mutual fund or a Hedge fund. Well, they are both pooled funds and both deal with investments but what's the difference then? Here they are:

1. Investors

Mutual finds have no limits on the number of investors so anybody who has money to invest can participate.
Mutual funds seek for new assets by advertising their company or promoting their previous returns and success. Hedge fund deals with more sophisticated investments so only professional or knowledgable investors can participate. The number of investors in a Hedge fund can be limited to 100 or so. To become an investor in a Hedge fund you need to be introduced or get a personal invitation. Hedge funds are considered to be a private financial company that can have its own policy and regulations. And to make sure that investors know what they are doing they need to be accredited investors and have a minimum annual income.

2. Regulations

Mutual Funds are regulated by SEC whereas Heedge Funds are not. Since they are regulated they have some restrictions or boundaries in their activities. Hedge funds are set up as limited partnership and the only limits they might have are the limits on those who can become an investor. 

3. Investment activity

Since Mutual funds are regulated they have limits and restrictions on their investment activity. An investment manager should invest only into listed stocks and follow all the procedures correctly as it is stated in a company's policy. They don't have any fredom in investing in any other stocks even if they find them very profitable. Hedge funds are much riskier and they offer higher returns which investment managers get by selling short, using derivatives or investing in risky stocks. 

4. Self-Investment

In Hedge Funds it is required that the fund manager also puts his money into same stocks as he does with the client's investments. If he doesn't do so it can be interpreted as a bad sign. In Mutual funds managers don't need to invest their own money into stocks.

5. Liquidity

Since Mutusl funds are usually very big it's not a problem to pull out your money any time. For Hedge funds it might be a problem and they might have a policy according to which you can get your money back only in some periods. 

6. Fees

In Mutual funds managers get an asset based fee only so the more investments they attract the better. In Hedge funds managers get an asset based fee and also a performance based fee. So the better the manager works and the higher returns he gets the higher the fee. This might result in a fact that managers might want to invest in very risky stocks to get higher returns and the chance of failure is too high.