hedge fund vs mutual fund

hedge fund vs mutual fund is the main difference “A mutual fund is a regulated investment product available to the public for daily trading. Hedge funds are private investments available only to accredited investors. The goal of hedge funds is to generate higher returns for their investors by taking on higher risks.”

The top of this list includes the popular mutual fund investment and the niche hedge fund investment. First, it is important to know what these two types of investments are and have some similarities.

Both mutual funds and hedge funds manage portfolios constructed from pooled funds with the goal of achieving returns through diversification. Using a pool of funds, a manager—or group of managers—invests in securities that fit a designated strategy with investment capital from multiple investors.

Retail investors and institutional investors have access to a variety of mutual funds managed by institutional fund managers. Hedge funds are geared towards exceptionally wealthy investors. Accredited investors are required to participate in these emergency funds.


Mutual funds are pools of money from various sources that are investing in various financial instruments such as stocks and bonds. Mutual funds offer low initial investment amounts and low risks. They do not achieve very aggressive returns because of their low risk. The general public can invest in them.

Investment in mutual funds provides an easy way for individual investors to gain access to a managed portfolio of publicly traded securities like stocks and bonds. The fund manager pools the money of investors in a mutual fund with money from other shareholders.

Investing strategies

A mutual fund is generally regarded as a safer investment than a hedge fund. 

Mutual funds invest in publicly traded securities based on criteria set by their managers. A manager may choose specific criteria, such as purchasing undervalued pharmaceutical stocks based on specific metrics, or he or she may choose more general criteria, such as purchasing every stock in the S&P 500 index. Mutual fund investors have access to a variety of strategies that are detailed in the prospectus.

Various types of mutual funds

Investors should be aware of a few different types of mutual funds.

Passive vs. actively managed funds.

Passive funds, or index funds, aim to duplicate the benchmark index’s performance by modeling a portfolio based on the index. Some funds simply buy every security in the index.

Fund managers who manage actively managed mutual funds attempt to beat the benchmark index by strategically buying and selling securities. 

Closed-ended vs. open-ended funds.

A closed-ended fund has a limited number of shares, so the portfolio manager doesn’t have to deal with inflows or outflows. 

Open-ended funds can issue an unlimited number of shares. A fund manager takes new inflows and allocates them to the appropriate securities after the investor buys shares.

No-load vs. load funds. 

No-load funds do not charge commissions.

A load fund pays a commission to the broker who sells the fund to the investor. Commissions are deducted from the investor’s funds either at purchase (front-loaded) or at the sale of the mutual fund (back-loaded).

How can investors invest?

A mutual fund is available to every investor. Investment minimums may range from $100 to $10,000 or more in some funds. A growing number of funds do not have a minimum investment requirement.

Investing in mutual funds: how fees work

The management fee for mutual funds is typically between 1% and 2% of the assets under management. Index funds generally charge lower fees. Broad-based index funds typically charge close to 0%.

Management fees are separate from those paid in load funds, which also include some of the investor’s funds. The management fee is paid directly to the mutual fund company each year.

Exactly how are mutual funds regulated?

Publicly traded mutual funds must register with the SEC in order to sell shares. The SEC enforces several laws, information about the management, and financial statements. Mutual funds are also required to disclose information about their financial health and investment policies under the Investment Company Act of 1940.


Hedging funds are also pooled funds, but their investors are affluent investors willing to take high risks in order to earn higher returns.

Hedge funds allow individual investors to gain access to funding managers’ investment ideas and strategies they believe have an edge in the market. Investment companies are structured as general partnerships, and investors buy directly into the investment company instead of purchasing publicly traded shares.

The best investment strategies

Hedge funds can use a variety of strategies in order to generate positive and outsized returns for their investors. In addition to using derivatives such as options and margin, hedge funds may also sell stocks short.

Hedge funds can also invest in just about any market, such as cryptocurrency, private real estate, and vintage single malt scotch. However, these strategies are not available in mutual funds due to SEC regulations. They are also much riskier than simply purchasing publicly traded securities.

Can anyone invest?

Hedge funds can only accept funds from accredited investors. The SEC defines a qualified investor as someone who has a liquid net worth (home equity does not count) of $1 million or an annual income of $200,000 (or $300,000 with a spouse). According to the SEC, those with higher levels of wealth are more sophisticated and better able to withstand the uncertainties and volatility associated with hedge funds.

A hedge fund usually requires an investment of $1 million or more. Their investment windows are usually limited, and they may have minimum holding periods. Investors may also be limited in when they can withdraw. Because of this, hedge fund investors require a good deal of liquidity outside of their hedge fund investments.

How hedge funds charge fees

Hedge funds charge two types of fees: 

  1. The management fee

2. Fees for a Performance

Management fees are similar to those charged by mutual funds. 

Generally, the performance fee is 20% of gains from the fund, as its name implies. Thus, if the fund gains 10% one year, the fund will take 20% (2% of the investment), and the rest will stay invested with the fund. 

The most common fee structure is called 2-and-20 and consists of 2% management fees and 20% performance fees.

Hedge funds: how are they regulated?

The SEC only requires hedge funds to register once they have total assets under management exceeding $100 million. Additionally, they must comply with Regulation D of the Securities Act of 1933 and limit their investors to accredited investors.

As a result, hedge funds are not required to file most reports with the SEC, and investing in a hedge fund is much more opaque than investing in a mutual fund.

Some additional considerations

Due to the fact that alternative investment strategies are unable to keep up with the stock market, mutual funds may actually provide better returns than hedge funds in bull markets.

However, those strategies can be invaluable in bear markets. When the stock market craters, the strategies may offer positive returns if their returns are uncorrelated with U.S. stocks. Then a hedge fund will truly live up to its name.

Although hedge funds promise big returns based on advanced trading strategies, they can go for long periods without delivering the anticipated results. Patient investors can benefit from them.

However, perhaps the time when hedge funds could outperform the average investor has passed. Most investors will be able to meet all of their investing needs with a mutual fund, but they can be a bit more boring than hedge funds. However, good investing is usually boring.


The pooled investments

Hedge funds and mutual funds are both types of investments that pool funds from different investors and invest in a portfolio of different securities, like equity and debt.


Stocks, bonds, and other securities are included in the portfolios of both hedge funds and mutual funds.

Professionally managed 

Finally, both hedge funds and mutual funds are managed by experienced fund managers who allocate the funds according to market trends.

Understanding hedge funds and mutual funds’ similarities make it easier to appreciate their key differences.

hedge fund vs mutual fund

Here are some differences between hedge funds and mutual funds, with the most important being that mutual funds are highly accessible, whereas hedge funds are not.

The general public can easily invest in mutual funds as the minimum investment amount is as low as Rs. 500. The initial investment required to invest in hedge funds is quite high, so not everyone is able to do so. In addition, only a specific group of people, such as banks, insurance companies, and high-net-worth individuals, are permitted to invest in hedge funds.

The management expenses of hedge funds are higher than those of mutual funds.

The management expenses for hedge funds and mutual funds are deducted from the investment, as they are both professionally managed. However, hedge fund expenses are much higher than those for mutual funds. A more aggressive and shrewd approach is necessary for hedge funds, mainly due to the more complicated nature of hedge fund management.

When the market is down, hedge funds typically give steady returns.

When the market is bullish, mutual funds provide excellent returns, while the returns are below average when it is bearish. However, the goal of hedge funds is to get steady and good returns regardless of market conditions. While mutual funds might perform exceptionally well in a bullish market, hedge funds will still give out steady but average results.

The hedge fund managers themselves must invest in the hedge fund 

Mutual funds are not personally interested in the performance of the funds they manage. Since their own investments are at risk, hedge fund managers are often required to invest substantially in hedge funds themselves.

SEBI does not regulate a Hedge fund.

Hedge funds are not regulated to the same extent as mutual funds, which are governed by (SEBI).

Mutual funds provide greater transparency.

Mutual fund reports, such as annual and quarterly balance sheets, are readily available to the public from mutual funds. The performance reports of hedge funds, on the other hand, are only available to the investors themselves.

Hedge Funds vs. Mutual Funds: Which Is Better?

Mutual funds and hedge funds are both investment products with managed portfolios for investors, but that’s about where the similarities end. High-net-worth individuals are targeted by hedge funds, which take on more complex and volatile trading strategies in an attempt to produce profits for their clients. Investing in mutual funds is available to anyone, but they are restricted in terms of what they can trade. A mutual fund manager’s primary goal is to outperform a benchmark index.

The key takeaways

 Mutual funds are:

  • Invest as little as $1 to pool money from all investors.
  • It is regulated by the U.S. Securities and Exchange Commission.
  • Trading is available every day that the stock market is open.
  • Usually invest in securities based on a specific strategy detailed in the prospectus.
  • As a percentage of assets under management, charge a flat fee.

Hedge funds:

  • Money from accredited investors with more than $200,000 in annual income or a liquid net worth over $1 million.
  • Limited time to invest and withdraw funds.
  • Use trading strategies such as derivatives, shorting, and buying alternative assets.
  • Fees are based on performance as well as assets under management.

Here are the main differences

Mutual funds Hedge funds
1. Don’t take a share of the profits. 1. Take ~20% performance fee from the profit.
2. Available to the general public 2. Only high-net-worth individuals and sophisticated investors can invest in them.
3. Management fees (normally 1–2%) 3. Charge a management fee (normally 2%) as well as a performance fee (10-30%)
4. Cannot make high-risk investments 4. Investments can be high-risk.
5. Tend to perform worse than hedge funds 5. Tend to perform better than mutual funds


Is it wise to invest in hedge funds?

The assets of hedge funds allow them to diversify and provide investors with a lack of correlation to the stock market.

Hedge funds or mutual funds: Which is better?

Hedge funds chase big fish – investments with high risk and high reward. On the other hand, mutual funds stick to the shallows where they can catch smaller but more reliable returns.

A hedge fund can lose money; is that true?

It’s true that the investors may have recovered 80% of their investments, but the issue at hand is simple: most hedge funds are designed to make a profit regardless of market conditions. Losses aren’t even a consideration—they are simply not supposed to happen.

What are the four types of mutual funds?

Investments in mutual funds fall into four broad categories: equity funds (stocks), fixed income funds (bonds), money market funds (short-term debt), or both equity and bond funds (balanced or hybrid funds).

What does a five-year return in mutual funds mean?

The annual return of investment is defined as the percentage change over a year. The annualized return represents the percentage change in an investment over a period of time shorter or longer than one year.


Suppose the average investor wishes to invest in their own share of the market. In that case, mutual funds are the way to go. one of the most popular investment forms due to their low minimum investment is a high net worth individual or company, and you are willing to take more risks by investing a large sum. A hedge fund might be a better investment option for you.