Hedge Fund vs Mutual Fund: What’s The Major Difference?

Hedge fund vs Mutual fund

Welcome to the showdown of the funding industry where the spotlight is on Hedge fund vs Mutual fund. It’s like comparing a family Hyundai car with a sleek sports car, both having best benefits at their own pace.

Hedge fund vs Mutual fund

Imagine both of these as a group of friends in a picnic gathering where one group likes  sharing the loads of work easily and are cautious and not in adventurous mode, whereas the other group is like the adventurous one who loves to take risks and are always the risk-takers and plan daring strategies. 

So here, the non-adventurous group of friends can be referred to as the mutual funds and the risk-takers adventurous group of friends is referred to as the Hedge funds space. 

You must be wondering why these Hedge funds are the risk-takers investment and mutual funds not? 

Well to address this query let’s unveil the difference between Hedge fund vs Mutual fund, that can help you clear this confusion among the two!

What are Hedge Fund vs Mutual Fund? 

Let’s clear the air of confusion and understand the concept of hedge fund vs mutual fund, to get the clear meaning of their names.

Hedge Funds 

Hedge fund

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 fund

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.

Let’s delve into comparative analysis of Hedge fund vs Mutual 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
Accessibility Easily accessible to everyone.Accessible only to high-net
worth individuals.
Differences Between Hedge fund vs Mutual Fund

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. 

If we go by the owners difference between the two, the owners of assets in hedge funds are few as they are accessible to some high net worth people, whereas, in mutual funds there are multiple owners for the funds as there are many investors investing in the particular funds. 

Mutual fund vs Hedge fund

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 FundFees in Percentage
Mutual FundRanges from 0.05% to as high as 5% or more. 
Hedge FundOperates as Two-and-Twenty fee, that means management
fee of 2% and performance fee of 20%. 
Fees Percentage of Mutual Fund and Hegde Fund

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: The two terms Investment and Speculation which often sound similar, but are actually two different terms offering a unique set of benefits and features. To know more about them in detail and get insights of it, visit our 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 returns25.32%
Last 3 months return 1.92%
Annualized return 7.01%
2022 returns -9.99%
2023 returns 10.41%
Financial Performance of Hedge Funds Over the Years

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: The Discussion 

As we come to the final stage of this ultimate showdown of Mutual fund vs Hedge fund, 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. If you’re someone looking for affordable and easily accessible funds over a steady period of time, then mutual funds are a great choice, on the contrary, hedge funds provide high returns but come with an exception of high investment.

Mutual and Hedge funds

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.

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Published By: Aashita Singh
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