No, Hedge Funds And Mutual Funds Are Not The Same

No, Hedge Funds And Mutual Funds Are Not The Same

by Aug 15, 2019Investments

In the world of investing, the idea of investors pooling funds together in order to achieve a higher level of diversification is not new. Pooled funds allow investors who would not otherwise be able to diversify their portfolio to get broader exposure to the market. With more widespread exposure comes a better chance of seeing good returns, as well as lower overall risk.

Two common ways investors can take advantage of pooled funds are with mutual funds and hedge funds. While both of these investment strategies share many of the same goals, they differ in a few key ways.
 

What Are Mutual Funds?

At the most basic level, a mutual fund is a collection of investment products–typically a combination of stocks and bonds–that has been created by an investment bank or other financial institution. Investors can purchase a share of the fund that gives them exposure to each type of asset in the portfolio.

For example, if a mutual fund is composed of one hundred different stocks, and you purchase a share of the fund, you then own an equal percentage of each of those one hundred stocks.

Mutual funds have been around since 1924 and are comprehensively regulated by the Securities and Exchange Commission. Right now in the United States, there are approximately eight thousand different mutual funds available for investors to choose from.

One of the great benefits for investors with mutual funds is that they can select one that matches their particular interest. Some mutual funds deal only with technology stocks, for example. Others funds are built to mirror popular indexes like the S&P 500, Nasdaq, or Dow Jones Industrial Average.

The vast majority of mutual funds are available to the public and can be bought and sold through any online brokerage or stockbroker.
 

What Is A Hedge Fund?

In practice, a hedge fund is very similar to a mutual fund. Hedge funds offer the same collection-of-investments approach that mutual funds do. What separates hedge funds from mutual funds, however, is that hedge funds are only offered privately. This means the general public is not able to access them.

Hedge funds are typically only offered to high net worth individuals. The other significant difference between hedge funds and mutual funds is that hedge funds usually employ riskier investment strategies in the hopes of higher returns. Hedge funds may utilize options, leverage, short-selling, and other alternative investment concepts to boost returns.

Because hedge funds are private, they are regulated differently than mutual funds, and different rules and requirements apply for those investing in them.
 

Choosing Between Mutual Funds And Hedge Funds

For the vast majority of investors, hedge funds are not a realistic option. And even if you have a few million dollars lying around and you feel like living dangerously, there are better ways to put your money to use than hedge funds.

For most people, a mutual fund with a strong track record is a much better investment. Mutual funds are a great addition to your broader financial portfolio, and a good financial planner can help advise you on picking the right mutual funds to meet your financial goals.

If you would like to learn more about investing in mutual funds, please contact us today for a free financial planning consultation.

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