What is the difference between hedge funds and mutual funds?

There are several major differences between hedge funds and funds of investment , from both a legal and practical point of view. Hedge funds have been in the news frequently over the past decade and have developed a reputation as an opportunity for investment only open to the rich. For most, this perception is correct. Strictly speaking, a hedge fund is a type of fund investment in the sense that a group of investors pool their funds and this consortium is managed by a professional money manager to achieve a profit. However, that’s where the similarities end.

mutual funds

The story of funds investment dating back to the early nineteenth century in the Netherlands, although modern funds as we know them in the United States began with the monopoly of investors Massachusetts in 1924. The first no-load fund came four years later in 1928. This was also the year that the first action and bonus fund investment (Background Wellington ) were born. The first hedge fund entered the scene in 1949 and was introduced by Alfred Winslow Jones. He created the fund to protect their long positions to shorten other actions. Four years later, became a limited partnership fund and began to collect 20 percent of annual earnings as a performance fee, a system that remains in place today.


The function of a fund investment is to make a profit within the framework of a strategy explicitly fixed investment . For example, the administrator of a small-cap growth is not allowed to invest in Treasury bonds by the background focus, even if one believes that Treasuries represent a better opportunity at that time. Unlike the case of funds investment a hedge fund manager is allowed to invest in anything you think you can generate a profit. If the values ​​do not look good, you can buy real estate or collectible stamps. There actually limit what a hedge fund can invest. Another critical difference is that the hedge fund is allowed to sell short shares of a fund investment can not. In a flea market, this gives the hedge fund a big plus.

While funds for investment are open to all investors, hedge funds are limited to individuals and corporations with high purchasing power. The funds investment can theoretically accept an unlimited number of investors, but hedge funds are limited in the number of investors who can accept to maintain their regulatory status. Most unregulated hedge funds are authorized for no more than 100 investors and each of these investors should have at least five million dollars. The minimum investment for a fund investment is generally very low, often $ 1,000 or even less for qualified retirement accounts. The minimum investment in a hedge fund is usually a million dollars. Although a new generation of funds, called fund of funds, plans to invest in several different hedge funds from individuals with low purchasing power, the minimum investment remains $ 25,000 or more. The charges involved in fund investment are very different from those of hedge funds as well. The funds investment charge an annual management fee which is fully described in the prospectus. Hedge funds employ a different system, more often the system “2 and 20”. This means that hedge funds charge a management fee of two percent plus a 20 percent performance fee of annual earnings of the fund. Although management fees can vary between one and four percent, and the performance fee can be as high as 30 percent, 2 and 20 is the industry standard.

The U.S. market fund investment is estimated to be a market of U.S. $ 12.5 billion. The hedge fund market is estimated to be a tenth of that.

Since a fund investment is not allowed to participate in reducing stocks or futures and other leveraged products, the disadvantage of an investor is limited. Due to the strong nature of leveraged hedge funds, their losses are usually nothing short of spectacular. Some high-profile losses of hedge fund management as Long Term Capital have needed government bailouts.