Hedge Funds Versus Mutual Funds

Hedge funds and mutual funds are really different animals altogether. A hedge fund isn’t necessarily a fund at all. There are many differences but a few of the major ones should be sufficient to differentiate the two.

Mutual funds are publicly traded and are subject to Securities and Exchange Commission (SEC) regulation. Hedge funds are not. Hedge funds are a private investment vehicle. Mutual funds sometimes have a minimum investment, possibly $2,000, more or less. Hedge funds are for the big spenders and require a minimum investment of $1 million. Mutual funds are open to any number of investors. Investors in hedge funds are limited to 499 investors.

There are other differences, but those above give you an idea of what is important. Also, hedge fund fees are much higher than mutual fund fees. Hedge funds are also very high risk. Some people have made a lot of money on hedge funds and some have lost a lot. Hedge fund critics point out that hedge fund managers make a lot of money whether their hedge funds are successful or not. This would seem to create a low incentive for being successful.

Also, because hedge funds are unregulated, just about anyone can start a fund and start taking money from investors. It is dangerous waters for the uninitiated and even some of the big money boys have gotten burned. The hedge funds tend to bet against a high market. They have to be right part of the time but then they have to be wrong part of the time.

Unless you have lots of money to throw around, I would stay away from hedge funds.