Difference between Hedge Funds and Mutual Funds

Investment can be done through various instruments available in the market. Hedge Funds and Mutual Funds are two such instruments. Hedge Funds are basically private investment portfolios specifically used by the richer class whereas Mutual Funds are more associated with regular investors having one common objective.

What are Hedge Funds?

Hedge funds are a type of private investment portfolio that use advanced risk management and investment techniques to produce profitable returns by investing in a variety of assets. Only a small number of authorized investors are permitted in the fund, and they combine their funds with the fund management to invest in a variety of assets. For managing funds, the fund manager gets charged a fee that is based on the profits earned by the fund’s assets.

A hedge fund is a type of investment partnership that exclusively accepts investments from a select group of wealthy investors. The initial investment requirement for the fund is rather substantial. The fund is exempt from restrictive rules. The risk component is particularly high in hedge funds, which is why the fund management uses risky methods like short selling, option trading, buying in stocks at significant discounts, anticipating a certain occurrence, etc. On the other hand, mutual fund invests in those financial instruments that reduce risk and increase returns.

What are Mutual Funds?

Mutual Funds can be defined as money pooled by a large number of people (Investors) having one common investment objective. The money collected under the scheme, usually run by an asset management company, is then invested in equities, bonds, money market instruments, and other securities by professional fund managers of the Mutual Funds. The portion of holding of the fund is provided as ‘Units’ to each investor in proportion to the amount invested by them. The income generated from the scheme is distributed among all the investors in proportion to their investment, by calculating Net Asset Value or NAV.

A mutual fund is a simple way for regular investors to gain access to a managed portfolio of publicly traded securities such as bonds and stocks. The management works to achieve the goals stated in the prospectus, which includes the benchmark index against which the manager’s performance should be measured and the investment approach they’ll use.

Difference between Hedge Funds and Mutual Funds

Basis	Hedge Funds	Mutual Funds
Meaning	A hedge fund is a portfolio of investments in which a small group of eligible rich investors pool their money to purchase assets.	Mutual funds are trusts in which the resources of multiple investors are pooled together to purchase a diversified basket of securities at a reasonable cost.
Return	Return is absolute.	Return is relative.
Management	It is managed aggressively.	Comparatively managed less aggressively.
Owners	It has few owners.	It has thousands of owners.
Investor type	Pension funds, endowment funds, and high-net-worth individuals are basic investors of hedge funds.	Retail investors are the investor of mutual funds.
Regulation	There are less regulations.	It is strictly regulated by SEBI.
Fees	The fund manager charges a fee that is based on the profit earned by funds.	It is totally based on the percentage of assets managed.
Transparency	Information is provided to investors only.	Annual reports are published and semi-annual disclosure of the performance of assets.