Hedge Fund & Mutual Fund

 Hedge fund & Mutual fund

        The hedge fund is pooled investment fund that invests in assets using complex strategies and management techniques. Hedge funds usually use derivatives, leverage, and short selling strategy to maximize their return. Only selected individuals such as accredited investors are eligible to invest in the hedge fund. Performance in hedge funds is measured by the absolute return method. They can open short positions in a bear market and open long positions in a bull market. That means hedge fund managers should make a steady positive return under any market condition. There are many types of service providers to hedge funds. Lawyers, marketers, and prime brokers & If I send money, there are enough places to buy and play a vital role in the hedge fund. But no service provider is more important than an audit firm or accountant.

A mutual fund is a professionally managed investment fund that is funded by shareholders. Mutual funds are investing in shares, bonds & other money market instruments. Unlike hedge funds, mutual funds give access to small investors to become shareholders of their fund. And usually, the performance of the fund is measured by comparing the results to the index. People tend to invest in mutual funds cause they offer professional money management, diversification, liquidity, and a relatively low dollar amount for initial investment. As benefits of the mutual fund, we can get increase the NAV, dividend distribution & capital gain distribution.

 

Usually, there are 4 different categories of mutual funds. And their features are,

 

1. Money market fund – These funds bear relatively low risk. They can invest in certain high-quality short-term investments.

 

2. Bond fund – Risk and rewards can be varying in bonds. Usually, bear higher risk than money market funds.

 

3. Stock fund – There are several types of stock funds.

Ø  Growth funds – Focus on potential above-average gain companies.

Ø  Income funds – Invest in dividend-paying companies

Ø  Index funds – Target particular market index such as S&P 500

4.        4. Target date fund – These are for individuals that have a particular retirement date in mind. Target date fund invests in stock, bonds, and other investments. They change their investment strategies according to the condition of the market.

Here is a summary of mutual funds and hedge fund.

 

Hedge fund	Mutual fund
Performance measured by absolute return	Performance measured by relative return
As a hedge fund manager you can use leverage, options & derivatives to enhance your portfolio	·   Ultimate goal is to enhance the value by using the fund's money
Ability to open Long & short positions according to market movement	Mutual fund managers can make money on bull markets
Fees – 1-2% management fee and usually charge around 20% from the capital gain as incentives	Fees typically range from 5 -2% for actively managed funds and 2% for passively managed fund
Get more attention in bear markets because they tend to perform.	Do not attract special attention unless the fund performs well
Investors need to prove their capacity to invest in the hedge fund.	Individuals use these funds for diversification & value enhancement