Question

Evaluate which fund structure (alternative mutual fund or hedge fund) you would choose for FIM. Your answer should briefly describe the advantages and disadvantages of each structure.

Answer 1

For my FIM I will choose the mutual fund because I am retail investor and my risk taking abilities are less than big investors or institutional invetors though each fund structure has its advantages and disadvantages. Below are few of advantages and disadvantages of mutual fund and hedge fund.

Advantages of Mutual fund:

1. Mutual fund uses advance portfolio management for the investors which is like optimizing risk and return.

2. They reinvest the dividend income into the fund which increase the number of unit and bring more return on long return due to this reinvestment.

3. Due to investment into different stock it reduces the risk due to diversification.

Disadvantages of Mutual Fund:

1. High Expense Ratio like sales charge reduces return.

2. Management abuse its authority by churing, window dressing etc this is like executing trade which is not necessary.

Advantages of Hedge Fund:

1. Provide higher return due to higher risk associated with the investment.

2. There are many instrument in which one can invest which lead to higher diversification benefits by reducing risk.

Disadvantages of Hedge Fund:

1. there is requirement of huge investment which is not possible for retail investors.

2. Hedge funds are less liquid and very difficult to sale the position at the time of loss.

3. Fee structure of the Hedge fund is very expensive.