Question

What is a hedge fund and how is it different from a mutual fund?  

Answer 1

A hedge fund is an investment pool that is responsible for the private collection of funds with the use of diverse and aggressive strategies for the purpose of earning regular and above normal returns for their investors. A hedge fund is a pool of money that takes both short and long positions, buys and sells equities, initiates arbitrage, and trades bonds, currencies, convertible securities, commodities and derivate products to generate returns at reduced risk.

Difference between mutual fund and hedge fund is as follows:

A mutual fund is an investment vehicle whereby the funds are pooled from several investors managed by a professional fund manager for purchasing various stocks from the stocks market. On the other hand, hedge funds are a portfolio of Investments whereby only a few established investors are permitted to contribute to the purchasing of assets. Mutual funds are tightly regulated by the SEC which is not essential in the case of hedge funds. Disclosure requirements are also quite a bit lower than for mutual funds. All Hegde fund performance disclosures are voluntary. A well managed hegde fund may be able to generate better returns in poor market conditions than mutual funds. The management fees for mutual funds depend on the percentage of assets managed whereas, for Hegde funds, the fees are based on the performance of the assets. The redemption of mutual funds is relatively easier to execute since the amount of funds is relatively less and whereas in hedge funds, the lock in period is a long time due to which redemption is not possible.