Question

What are the differences between Hedge Funds and Mutual Funds? Specify the differences with respect to each of these four areas:

A. Investors B. Regulation C. Fees for managers D. Risks and Investment Strategies

(I want you to type the anwer)

Answer 1

Investors:

Investments in hedge funds are made by a specific group of sophisticated high networth individuals. Generally hedge fund investors are required to have net worth of atleast 1 million dollars. The U.S. government deems them as "accredited investors". Therefore, only a few individuals invest in hedge funds with high risk appetiate.

Investments in mutual funds can be made by anyone with minimal amount of money.

Regulation:

Hedge funds are not heavily regulated like mutual funds. They are not required to register with SEC. They are also not required to make periodic reports under securities exchange act of 1934. Regulations may not require hedge fund to disclose their strategies to investors. They are less transaparent compared to mutual funds.

Mutual funds are highly detailed and highly regulated. The SEC act of 1934 required mutual fund companies to regularly report to their investors. They are subject to rigorous oversight. The SEC is charged with overseeing the mutual fund industry’s compliance with these regulations

Fees for managers:

Typically a hedge fund charges an asset based fee and a perfromance fee. For example: the asset based fee may be 2% and fund based fee may be 20%.

Mutual fund includes several fees such as sales load, redemption fee and purchase fee.

sales fee: These fees or the broker’s commissions are usually charged either upon purchase or else upon sale of fund. They include front load and back-end load

Redemption fee - redemption fee is charged when shares are sold.

Purchase fee - purchase fees are charged at the time of purchase

Risk and investment strategies:

Hedge funds are riskier than mutual funds as the fund generally have no restriction on applying any strategy. These startegies include trading in derivatives. Some of the strategies are event driven strategies such as merger arbitrage, distressed/restructuring. There are also relative value strategies such as Fixed income convertible arbitrage, fixed income asset backed, fixed income general, volatility and multi strategy.

Mutual fund are less risky compared to hedge funds as these funds are restricted to the strategies mentioned in the prospectus. Ssome of the most commonly used mutual fund strategies are Buy and Hold strategy, the wing it strategy, perfromance weighting strategy and market timing strategy.