Hedge funds vs mutual funds - Singapore Forex Trading, Singapore Forex Academy, Singapore Forex Association

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Hedge funds vs mutual funds

1. A mutual fund is an investment vehicle whereby the funds are consolidated from several investors managed by a professional fund manager for purchasing a basket securities from the stock market. 

On the other hand, hedge funds are a portfolio of investments whereby only a few established investors are permitted to contribute for purchasing of assets.

2. The objective of mutual funds is to offer returns in excess of the risk free rate of return which is being offered by the market whereas hedge funds aim to offer maximum possible returns from the investment made.

3. The investors of mutual funds are retail investors (common man) who divert their limited disposable income in these funds with the hope of growing their money whereas those making investments in hedge funds are generally HNI’s or established individuals with a large appetite of risk. These investors make very large investments and desire very high returns in a quick time.

4. Though both types of funds are managed by a professional fund manager, a mutual fund manager does not hold a substantial interest in the working of the fund. 

Hedge fund managers have a mandate to hold a large share in the respective fund to generate a level-playing field on the part of the manager and prevent any decisions that can be detrimental to the overall interest of the fund.

5. Mutual funds are tightly regulated by the Securities exchange board of the respective country which is not essential in the case of Hedge funds.

6. In terms of transparency, mutual funds have to completely adhere in the form of yearly publishing of annual reports/balance sheet in addition to quarterly performance of assets. These disclosures have to be made public with the statement being sent to all the investors stating the overall performance. 

Hedge funds offer the information only to the investors without any public disclosure of information.

7. The Management fees for mutual funds depend on the percentage of assets managed whereas for hedge funds, the fees are based on the performance of the assets.

8. Numerically, mutual funds have a large number of investors with each having a limited investment [as low as $8.33] whereas hedge funds have a small number of very large investments by each investor [minimum $10 million investment].

9. The redemption of mutual fund is relatively easier (open ended funds) to execute since the amount of funds is relatively less and whereas in hedge funds, the lock in period is a long time (generally 3 years) due to which redemption is not possible. Subsequently, redemptions are made in blocks and 100% amount cannot be redeemed.