Introduction To Investment

Today, we are going to cover the most important topic for investors which is hedge fund vs. mutual fund. Investing, stock speculation, mutual funds, hedge funds, banks, and investment consultants have been put under the spotlight since the 2008 financial crisis. As a result, many people have become afraid of investing their money, and bring it to the bank at all-time low interest rates. Nevertheless, investing can still prove to be beneficial on the long term, for future expenses, or as an additional retirement.

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hedge fund vs mutual fund

I believe that you will admit that we are in the midst of one major crazy financial mess. The part that makes things really crazy is the fact that it’s not just in the United States anymore but rather serious global problem which if not handled properly could change the way we live our lives. Hopefully things don’t get crazy but I truly do know one thing; FEAR is one of the most powerful force on the earth and folks do some crazy things when they are backed into the corner.

What Is Mutual Fund?

Mutual funds is a great way to invest in a basket of products, such as:

  • Stocks
  • Bonds, or
  • Real estate.

The basket is managed by a fund manager, who will select which values should be added or removed from the basket, and when. Funds can be product oriented (e.g. stocks, real estate). It can have a strong industry focus, a regional focus, or a combination of all. Therefore, by investing in mutual funds, you are investing in particular segments, of which you believe they will perform well over time, but more importantly you are investing in the knowledge and resources of the fund manager, whose task it is to keep the fund growing and to limit its losses in bad times.

mutual fund vs hedge fund

How To Invest In Mutual Fund?

In order to invest in mutual funds, you will need an investment account at your bank or at one of the many brokers available. Mutual funds can be bought in a similar way like stocks, but instead or buying a share in a company, you are buying share of a basket, a fund. Funds can, like stocks, pay out dividends on a periodical basis, or not.

Types Of Mutual Funds:

  1. Money Market Funds – Money invested in assets for a short period (Periodic Investment)
  2. Fixed Income Funds – Money invested in fixed bonds for long term return.
  3. Equity Funds – Money invested in stock market (Risk is higher)
  4. Balanced Funds – Money invested in different assets just to achieve target return.
  5. Index Funds – Money invested in stock market index.
  6. Specialty Funds – Money invested in special assets like real estates or commodities.
  7. Fund of Funds – More or less similar to balance funds.

What Is Hedge Fund?

In other terms, hedging means risk reduction. This is what most hedge funds are meant to do. In the investment world, risk is usually a function of returns, the higher the risk the more the expected returns for that particular investment. Hedge fund managers are meant to work in such a way that they can reduce the risk without really cutting into the investment income.

what is hedge fund

Unlike most types of investments, hedge funds are not particularly liquid. This means once you are in, it is more difficult for you to sell your shares. This is usually because; hedge funds will try to generate returns over a specific period of time. This period is known as the “lockup period” where it is not possible for an investor to sell their shares. Because most investments are done over a long period of time, an investor may be in lockup for years at a time.

Is Hiring A Fund Manager Necessary?

First, hire a fund manager because a manager can take the stock market risks from the fund’s portfolio by selling the stock index futures.

Alternatively, they can increase the returns from the investments of relatively low risk investments by borrowing money. Even with all these strategies, one should note that the risks will remain. Because their work is not very simple given that taking risks away from an investment is not entirely possible.

Fund managers are paid a higher amount of money and are paid differently from other investment managers. In addition to earning a certain percentage from the money the investors have earned, managers get a “management fee” which could be anywhere between 1% and 4% of the net value of the fund’s assets. While this is good for the managers, it is not very good for the investors as it can be frustrating to pay poor performing managers. It could also lead to managers investing more aggressively to get more money and thus increasing investor risks.

Types Of Hedge Fund

  1. Fixed Income Arbitrage – High leverage Opportunities
  2. Fund Of Funds – Money will invested in basket of different funds to get target return.
  3. Long / Short Equity – Money invested in a stream of long and short term investment.
  4. Global Macro – This is based on the financial stability of global environment.

Now, lets comes to the most important topic which advantages and disadvantages of hedge fund vs mutual fund.

Difference between Hedge Fund Vs Mutual Fund

Mutual Fund Hedge Fund
Mutual funds is a great way to invest in a basket of products, such as stocks, bonds, or real estate usually involve a range of investment techniques and generally invest in a wider range of assets.
It is simple to invest.  A lot of expertise required to understand its methodology.
Managed by fund manager. Managed by fund manager
Multiple opportunities
You can earn average return You can earn high rate of return
Low – Medium risk High – very High Risk
Offers transparency Least transparency
Low- Medium fee structure Medium – High fee structure
Best for short to long term investment Best for long term investment
High liquidity Low liquidity
Predictive investor strategy Planned Investor strategy

List Of Top 10 Hedge Fund Companies In USA

  1. Viking Global Investors LP
  2. Man Group plc
  3. Lone Pine Capital LLC
  4. AQR Capital Management LLC
  5. BlackRock
  6. BlueCrest Capital Management
  7. Brevan Howard Asset Management LLP
  8. Och-Ziff Capital Management Group LLC
  9. J.P. Morgan Asset Management
  10. Bridgewater Associates LP

Conclusion

Mutual FundsInvesting in mutual funds can prove to be very beneficial, as you will automatically invest in the background, market fluctuations are flattened, and you have a mutual fund manager in the background who will do all the work of selecting which products should be added and removed from the fund. Your task, however, is to regularly evaluate the performance of the fund, and decide whether you would like to keep it, or perhaps exchange it against another fund. If you are not well familiar with familiar fund, it is recommended that you seek a specialist, who can help you in your decisions.

Hedge funds are not regulated by the US security and exchange commission (SEC). They, therefore, do not have any financial industry oversight entity although in the recent past debates have pointed to the fact that there will be an oversight entity placed soon to regulate this complex industry.

The next time you hear someone talking about this type of investment, you should take a look at these definitions and compare them to see if it is the right type of investment for you.