While hedge funds have become quite popular among the super rich, many still have no clear idea about its distinction with mutual funds. These two differ in many aspects. Here is a synopsis of the major differences between hedge funds and mutual funds.
- A mutual fund is an investment vehicle registered with the US Securities and Exchange Commission while a hedge fund is private in nature.
- Mutual funds have limited use of methods like leverage, derivatives and short sales which are the prominent strategies used in the other one.
- While a specialty fund may employ various investment strategies, this is limited when it comes to collective investment schemes. This is the reason the former is more flexible than the latter.
- Small minimum investments are acceptable for mutual funds. However, only large investments are acceptable in the specialty ones. This is why only selected individuals or organizations can invest in an exclusive one.
- You may get the details of a collective investment vehicle from a prospectus circulated among all, but this isn’t so in case of a specialty fund. These are offered only by private placement memo.
- Mutual funds may use advertisements for promotions but exclusive funds don’t have this opportunity. There is a restriction on advertisement when it comes to hedge funds.
- In case of a mutual fund, you have daily liquidity and redemption but in the other type, liquidity is usually on a monthly or annual basis.
- The basic aim is also quite different. The collective investment scheme focuses on outperforming the market benchmark. On the other hand, the specialty funds aim for the goal of absolute return.
- The manager in charge of a mutual fund is paid on salary basis while that of the exclusive fund is paid according to his/her performance.
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