The showdown of Hedge fund vs Mutual fund is like comparing a family Hyundai car with a sleek sports car, both having best benefits at their own pace.
Hedge Funds
The risk-takers investors space who loves to chase high returns. Hedge funds are referred to as the private portfolios of investors. Hedge funds are investments funds that pool capital from accredited or institutional investors and employ various high end and aggressive strategies to generate high returns.
Accredited investors are the people whose net worth is over $1 million, in the earned income in the past two calendar years. These are referred to as the special status investors under financial regulation laws.
These funds are known for their flexibility and often use sophisticated techniques beyond the traditional investments methods. It uses options like short selling, leverage, etc. These funds are private and unregistered. Offers investment in different markets and strategies.
Mutual Funds
Mutual funds are investment vehicles that take money from many investors and invest them in diversified portfolios of stocks, bonds, or other securities categories. All this work is managed by professional fund managers, whose sole and major responsibility is to make investment decisions on behalf of the investors who have invested their money with them.
Mutual funds come in various types like, the bond funds (referred to as investing in bonds), the equity funds (referred to as investing in stocks), debt funds, hybrid funds, exchange traded funds, etc.
| PARAMETER | MUTUAL FUND | HEDGE FUND |
| Investors | Retail investors with limited income | High-net worth individuals |
| Owners | Many | Few |
| Returns | Relative return over a period of time | Absolute or high returns |
| Regulation | Regulated by SEBI | Limited less regulation |
| Availability | Public | Privately available |
| Transparency | Can get annually published reports and disclosure on performance of funds. | The information regarding funds is only disclosed to investors. |
| Performance fees | Fees is based on the performance of assets managed and charged (mainly set around 1% to 2%) | Performance based (typically varies from 10 – 30%) |
| Minimum investment | Low | High (minimum can be Rs.1 crore) |
| Flexibility | Investment managers can make significant changes in strategies. | Has to follow and adhere to the strategies adopted at the beginning. |
| Liquidity of investment | High (can easily bought and sold) | Low (requires a certain criteria) |
| Accessibility | Easily accessible to everyone. | Accessible only to high-net worth individuals. |
The above table depicts the distinct characteristics of hedge fund vs mutual fund, each depicting unique benefits. The major underlying difference between these two is that mutual funds are easily available and accessible, but hedge funds are privately held funds and are offered privately only.
Investors in mutual funds are the retail investors who have limited or disposable income, where they can easily buy and invest in mutual funds at relatively low cost as compared to hedge funds. Whereas hedge funds are available and offered to high-net worth individuals. These funds are offered privately and not available in general.
Mutual funds offer a high transparency, as the information regarding performance of funds are easily available as annually published reports, while hedge funds offer information regarding performance of funds only to the investors privately.
One crucial factor to differentiate between the two can be the performance fee they charge. Hedge funds charge high performance based fees that can range from 10% to 30%. Whereas mutual funds charge comparatively less fee as compared to hedge funds. They charge about 1%-2% of the performance of assets.
While the liquidity factor between the two can offer divergence. In hedge funds the liquidity of investment is less as compared to mutual funds because these funds are available at a high charge and require a high amount of investment, whereas in mutual funds, the liquidity if investment is high, as these funds are available at an affordable cost and can be easily bought or sold.
Fees Factor of Hedge Fund vs Mutual Fund
| Type of Fund | Fees in Percentage |
| Mutual Fund | Ranges from 0.05% to as high as 5% or more. |
| Hedge Fund | Operates as Two-and-Twenty fee, that means management fee of 2% and performance fee of 20%. |
From the above table we can depict that mutual funds charge a smaller percentage of funds as their fees, while hedge funds follow a Two-and-Twenty fee structure, where two refers to the management fees of 2%, and twenty refers to performance fee of 20%.
Note: Also, visit the article, Investment Vs Speculation.
Statistical Performance of Hedge funds over the years
Below are the returns of hedge funds over the years with their annualized and best returns.
| Aspects | Percentage ( %) |
| Best monthly returns | 25.32% |
| Last 3 months return | 1.92% |
| Annualized return | 7.01% |
| 2022 returns | -9.99% |
| 2023 returns | 10.41% |
Hedge funds returns have increased over the years, as it recorded the latest returns of 10.41% for the current year 2023 and an annualized return of 7.01%.
While the top mutual funds with high 1 year returns are Motilal Oswal Mutual Fund, SBI Contra Fund, Quant Tax Plan, HDFC ELSS Tax Saver fund, etc. These mutual funds not only have good one year returns, but they do have good three year as well as five year returns. However, returns percentage can change or fluctuate with time.
Summing Up
Both have unique features and strategies to offer. One of the major differences between the two is that the hedge funds are available for high-net worth people, whereas mutual funds are quite affordable and can be accessed by anyone.
There are other factors too that highlight the basic differences between the two.
While looking to find out the major or the basic difference between mutual fund vs hedge funds, do look at the above discussion as it can be your ultimate guide on this journey.
