Investments in mutual funds and hedge funds have witnessed a sudden increase in 21st century. Although these two look similar, but they do share a lot of differences. In this article we will be discussing about the similarities and differences between them.

SIMILARITIES:

  • Mutual funds and hedge funds both are formed of money collected from its investors. The investors invest money with the aim of earning returns.
  • Mutual funds and hedge funds both are managed by a professional fund manager. The fund manager invests the collected funds with the objective of generating good return.
  • Both these funds charge the investors for their service.

KEY DIFFERENCES:

  • Mutual funds have more liquidity than hedge funds. The investor can get his/her net asset value, of the mutual fund, on any business day. While the hedge funds contain lock up periods during which the money cannot be redeemed.
  • The two are different in admission of the new investors. Anyone willing to invest can invest in a mutual fund, but in case of hedge funds it is not that simple. Only selected investors can invest in hedge funds. If a new investor has to join the hedge fund, then he/she needs to go through a series of permissions to invest. A hedge fund has very few investors but mutual funds have millions of investors.
  • Nature of investors involved in the two is different. The investors of mutual funds are the ones who belong to the middle class of society. While the investors of hedge funds are the ones who have a high net worth. This difference also affects the risk involved. The mutual funds generally make a diversified portfolio with low to minimum risk involved. On the other side hedge funds are aggressive in their investments. As the investors of high net worth, therefore they are able to take greater risks.
  • They also differ in choice of investments. Mutual funds are generally invested in stocks and its derivatives. The stocks are chosen on the basis of type of fund being formed. Mutual funds stocks can be of a large cap, mid cap or small cap company, solely depending on the nature of fund. Whereas hedge funds can be invested in any asset. These assets can be real estate, currencies, bonds, stocks, etc.

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