20+ Differences between Hedge funds And Mutual funds (Explained)

Sometimes, instead of buying and selling financial securities individually, people prefer investing in low-risk funds like Hedge funds and Mutual funds. Unfortunately, both terms are often confused with one another.

The major difference between Hedge and Mutual funds is that the former is largely used by rich investors and is considered moderately liquid. In contrast, common investors can use the latter and are considered highly liquid.

In This Article

Comparison Between Hedge Funds And Mutual Funds

Hedge funds	Mutual funds	Hedge funds
Meaning	When a small group of wealthy investors comes together to invest in financial securities together, it is known as a Hedge fund. This coming together of rich people can also be defined as forming a partnership.	When a large group of common people comes together to invest their money in various financial securities, it is known as Mutual funds.
Types	These funds can be broadly categorized into eight main categories: Stock, Bond, Index, Balanced, Money Market, Income, Global, and Speciality.	These funds can be broadly categorized into four broad categories: Global Macro, Equity, Relative Value, and Activist.
Regulation	One of the notable features of these funds is that stock commission authorities govern them in most countries. In the United States of America (USA), these are governed by the Stock Exchange and Commission.	One of these funds’ major drawbacks is that governed authorities do not regulate these funds. The Stock Exchange and Commission do not regulate these funds in the USA.
Management	These funds follow a moderately aggressive approach. This means that they try to generate gains by taking a moderate risk.	These funds follow a highly aggressive approach meaning they try to generate more gains by taking a high risk.
Risk	Since a moderately aggressive approach manages these funds, they are considered to have a lower degree of risk than Hedge funds.	Since a highly aggressive approach manages these funds, they are considered to have a higher degree of risk.
Suitable for common people	These funds are considered much more flexible for common people because they are considered to be less risky and give appropriate gains.	These funds are not considered flexible for common people because they carry high risks. Additionally, people investing in these funds are generally wealthy and want to gain more by taking more risks.
Participation	In these types of funds, anyone can participate. There are not any requirements to participate here. Common people and a large number of people are both welcome.	These funds generally demand some requirements, such as people investing here are generally wealthy people, and the circle of people is also very small.
Minimum investment	The minimum investment in these funds is much less than that of Hedge funds. The average minimum investment in these funds ranges from 500-5000$.	The minimum investment involved in these funds is comparatively higher than that of Mutual funds. The average investment in these funds ranges from 100,000-20,00,000$.
Trading	The time of trading of these funds is considered unusual because most of the financial instruments are traded during the working hours of stock markets. But in the case of these funds, these are traded after the closing of stock markets, i.e., at the end of the day.	These funds are traded just like most financial securities, i.e., during the working hours of stock markets.
Securities	The variety of financial instruments that can be traded through these funds is limited to Hedge funds. These funds typically deal in stocks and bonds.	The variety of various financial instruments that can be traded through these funds is more than Mutual funds. Along with stocks and bonds, these funds also trade currencies, derivatives, real estate property, etc.
Updation of prices	One of these funds’ best features is that there is a daily update or change in prices.	The prices of various securities are not updated daily in these funds.
Redemption	One of the biggest flexibility of these funds is that they can be redeemed on any given business day as and when investors wish.	There is not much flexibility in these funds when it comes to redemption. These funds can not be redeemed on any given day. These can only be redeemed on a monthly and annual basis. Moreover, these funds can not be redeemed for at least one year after investment.
Liquidity	Since these funds can be easily redeemed, these funds are considered more liquid than Hedge funds.	Since these funds can not be easily redeemed, these funds are considered less liquid than Mutual funds.
Expense ratio	These funds have a lower expense ratio than Hedge funds. The only fee included in these funds is the 12b-1 fee. Their expense ratio usually ranges between 0.73 percent to 1.45 percent.	These funds have a higher expense ratio than Mutual funds. This is large because these funds have two types of fees: a two percent management fee and a twenty percent performance fee. The expense ratio of these funds typically ranges around 1.6 percent.
Advantages	The major advantages of these funds are that they have good liquidity, skilled professionals handle them, and they require a minimal minimum investment. Along with that, these funds are also associated with low risk and minimal fees.	These funds are associated with high gains and are managed by top-notch portfolio managers. Various investment styles and approaches are the major advantages of these funds.
Disadvantages	The major disadvantage of these funds is that they have very high fees and expense ratios. Along with that, there is low to moderate transparency in this process. Also, people think comparing a fund with others is not easy.	These funds are not only associated with high risk but also can result in high losses. They also demand high minimum investment and provide little to no flexibility regarding liquidity and redemption.

Major Differences Between Hedge Funds And Mutual Funds

What exactly are Hedge funds?

When high-end investors want to come together and invest their money in various financial securities, it is known as Hedge funds. High investors coming together to invest can be referred to as a limited partnership between the investors.

These funds generally require only a few people to invest and generally demand a huge minimum investment. Thus common people typically do not invest in these funds. One of the major drawbacks of these funds is that they are not regulated by any regulating authority, like the Securities and Exchange Commission in the USA.

Features of Hedge funds:

To invest in these funds, a few wealthy people form a limited partnership and invest their money altogether in various financial instruments or securities.

Only certain people are welcome to invest in these funds. These are typically not considered best suited for common people to invest in.

Just like Mutual funds, these funds are managed by professional portfolio managers.

These funds also require people to make a huge minimum investment.

Stock commissions in most countries do not regulate these funds. In the USA, unlike Mutual funds, these funds are not regulated by the Securities and Exchange Commissions.

These funds are considered to be highly aggressively managed, meaning these funds try to generate more gains by taking more risks.

These funds can not be redeemed daily. These funds can only be redeemed weekly, monthly, quarterly, or annually.

These funds can be broadly categorized into four classes: Global Macro, Equity, Relative Value, and Activist.

Key Differences: Hedge funds

It can be described as a group of securities invested from the money collected by rich investors.

Unlike Mutual funds, not all investors can participate in these types of funds. The opportunity to invest in these funds is only provided to a few investors.

Common people generally can not invest in these funds.

A smaller number of investors are investing in these funds, and all those investors are typically wealthy. Due to this reason, these funds demand a huge minimum investment.

There is not much flexibility in these funds regarding redeeming investments. Anyone who wants to redeem their securities can do so monthly, quarterly, or annually.

What exactly are Mutual funds?

When a group of typically common people comes together to invest in various financial instruments and securities by collecting money, it is called Mutual funds. There is a huge amount of people who invest in these funds as these funds happen to be more flexible than Hedge funds.

This is so because these funds neither demand wealthy people nor require a huge minimum investment. Moreover, one of the classic advantages of these funds is that they are regulated by authorized stock commissions in most countries, like the Securities and Exchange Commission in the USA.

Features of Mutual funds

To invest in these funds, a large group of common people comes together to use their money to invest in various financial instruments and securities.

These funds are best suited for especially common people.

Like Hedge funds, these funds are also handled by professional portfolio managers.

These funds do require people to make a minimum investment. However, the minimum investment is very minimal.

One of the best features of these funds is that they are completely governed by regulating stock commissions. For example, these are regulated by the Securities Exchange and Commissions in the USA.

These funds are considered to be moderately aggressively managed, meaning they try to generate gains by taking the risk, but the amount of risk is considered to be lesser in these funds than in Hedge funds.

One of the other flexible features of these funds is that they can be redeemed even daily.

These funds can be broadly categorized into eight categories: Stock, Bond, Index, Balanced, Money Market, Income, Global, and Speciality.

Key Differences: Mutual funds

It can be best described as a group of various securities invested through the money many investors collect.

One of the best features of these funds is that anyone can participate in these funds. It does not require many qualifications or wealth.

Common people can easily participate in these funds.

There are a large number of people investing in these funds, and investors are largely common people. Thus, these funds do not require a high minimum investment.

Flexibility in redeeming securities is another one of the best features of these funds. Anyone who wants to redeem their securities can do so on any day.

The Contrast Between Mutual Funds And Hedge Funds

Meaning

Mutual funds – It refers to a large group of people coming together to invest their money together in several financial securities and instruments. These funds do not require a particular set of people to be considered fit for investing. Mostly anyone can come forward and invest in these funds.

Hedge funds refer to a small group of rich people coming together to invest their money privately in several financial securities and investments. These funds typically require only a set of people to invest in these funds, generally wealthy individuals.

Types

Mutual funds – These funds can be broadly categorized into eight main categories: Stock, Bond, Index, Balanced, Money Market, Income, Global, and Speciality.

Hedge funds – These funds can be broadly categorized into four broad categories: Global Macro, Equity, Relative Value, and Activist.

Types of Mutual Funds and Hedge Funds

Mutual Funds

Stock Funds: As the name suggests, these types of funds are concerned with investing in several stocks.
Bond Funds: These types of funds are concerned with investing in Bonds and helping the client generate a regular income in the form of interest received as a return.
Index Funds: These funds are very similar to Exchange Traded Funds (ETFs) as these funds also rely on indexes to make investment decisions.
Balanced Funds: These funds are concerned with mixed investments, meaning instead of either investing in stocks or bonds or others, these funds invest in all types of financial assets.
Money Market Funds: These types of funds are concerned with investing in financial securities that are short-term in nature but are high in quality.
Income Funds: As the name suggests, these types of funds are concerned with investing in those securities that provide a regular income.
International or global funds: These types of funds are concerned with investing in those securities that exist only outside the domestic country.
Specialty Funds: These types of funds target a particular industry or sector regarding investing.

Hedge Funds

Global Macro Hedge fund: These funds can be best described as private investments that work by taking the benefits of waves caused in the global market due to various major economic events.
Equity Hedge fund: This type of fund is concerned with purchasing overvalued securities by benefiting from the decline in the stock markets.
Relative value Hedge fund: These types of funds work by taking the benefits of unequal patterns of the stock market prices.
Activist Hedge fund: These types of funds work by contributing majorly as a shareholder in a company.

Regulation

Mutual funds – One of the classic features of these funds that distinguishes them from Hedge funds is that governed authorities of stock commissions in most countries regulate them. In the United States of America (USA), these funds are managed by the Securities Exchange and Commission.

Hedge funds – One of the major drawbacks of these funds is that any governed authorities of stock exchanges in most countries do not regulate them. The Securities Exchange and Commission of the USA do not regulate these funds.

Management

Mutual funds – When it comes to management, these are managed by skilled portfolio managers; however, their approach to managing these funds differs from that of Hedge funds. These funds are estimated to be managed by a moderately aggressive approach. It means that these funds try to gain capital gains by taking a low to moderate level of risk.

Hedge funds – Just like Mutual funds, these funds are also managed by professional portfolio managers. However, their approach is a little different from Mutual funds. These funds are managed by a more aggressive approach meaning these funds try to generate more gains by taking a high level of risk.

Risk

Mutual Funds – Since a moderately aggressive approach manages these funds, these funds carry less risk than Hedge funds. The main reason behind this is that people investing in these funds are generally common people who are not signing for a high amount of risk.

Hedge funds – Since a highly aggressive approach manages these funds, these funds carry a higher degree of risk than Mutual funds. The main reason behind this is that people investing in these funds are generally high-end wealthy investors who want to generate more gains by taking more risks.

Suitable for common people

Mutual funds – Given a low risk and a minimal minimum investment, these funds are considered more flexible for common people than Hedge funds.

Hedge funds – Given a high risk and a huge minimum investment, these funds are considered less flexible than Mutual funds.

Participation

Mutual funds – One of the hallmark features of these funds is that anyone can participate in these funds. Unlike Hedge funds, these funds do not demand only wealthy investors who can invest. Along with this, many people can also participate in these funds.

Hedge funds – The major feature of these funds distinguishing them from Mutual funds is that they specifically demand only high-end wealthy people for investing purposes. Not only limited this, but only a few people can participate here.

Minimum investment

Mutual funds – The minimum investment involved in these funds is minimal compared to Hedge funds. The minimum investment to participate in these funds typically ranges from at least $500 to at most $5000.

Hedge funds – The minimum investment involved in these funds is very high compared to Hedge funds. On average, the minimum investment involved in these funds typically ranges from at least $100,000 to at most $20,00,000.

Trading

Mutual Funds – Mostly, different types of financial securities, such as stocks, ETFs, bonds, etc., usually trade during the working hours of the stock market. But it is completely different in the case of Mutual funds. Typically, these funds are traded after the closing of stock markets, i.e.

Hedge Funds – Like most financial instruments, these funds are traded when the stock markets are available.

Securities

Mutual funds – One of the most important aspects of any fund is the various financial securities they deal in. It can be said that the financial instruments involved in these funds are more limited than in Hedge funds. These funds are largely associated with stocks and bonds in trading.

Hedge funds – One of these funds’ major benefits is their trade area. These funds deal in many financial instruments and have more variety than Mutual funds. These funds not only deal in stocks and bonds but also in various currencies, derivatives, and real estate.

Updation of prices

Mutual funds – Another notable feature of these funds is that their prices are updated daily at the end of the day.

Hedge funds – There is no daily update of prices in the case of Hedge funds. Their prices update or change only during specific days.

Redemption

Mutual funds – These funds offer great flexibility when it comes to redemption. These funds can be redeemed at any possible time during business days. In addition, there are not any restrictions on the redemption of these funds.

Hedge funds – Redemption of these funds completely differs from the redemption of Mutual funds. Firstly, these funds can not be redeemed for at least one year of investment. Secondly, these funds can not be redeemed on any given day. Instead, these funds typically can be redeemed monthly, quarterly, or annually.

Liquidity

Mutual funds – Since these funds can be redeemed anytime per investors’ wishes, these investments are considered more liquid than Hedge funds.

Hedge funds – Since these funds are not considered flexible regarding redemption, these funds are considered less liquid than Mutual funds.

Expense ratio

Mutual funds – These funds are considered to be less expensive than Hedge funds. These funds consist of a 12b-1 fee that is associated with a marketing fee that has to be paid on an annual basis. The expense ratio of these funds ranges from 0.73 percent to 1.45 percent.

Hedge funds – These funds are considered to be more expensive than Mutual funds. This is largely because of the presence of two types of fees: management fees and performance fees. The former is associated with two percent, while the latter is associated with a twenty percent fee. Therefore, the expense ratio of these funds can be approximately estimated to be 1.6 percent.

Advantages

Mutual Funds – The major advantages of these funds are that they have good liquidity, skilled professionals handle them, and require a minimal minimum investment. Along with that, these funds are also associated with low risk and minimal fees.

Hedge Funds – These funds are associated with high gains, are managed by top-notch portfolio managers, and there are various investment styles and approaches are the major advantages of these funds.

Disadvantages

Mutual Funds – The major disadvantage of these funds is that they have very high fees and expense ratios. Along with that, there is low to moderate transparency in this process. Also, people think comparing a fund with others is not easy.

Hedge Funds – These funds are not only associated with high risk but also can result in high losses. They also demand high minimum investment and provide little to no flexibility regarding liquidity and redemption.

Conclusion

Mutual and Hedge’s funds are often confused, possibly due to several similarities. The major difference between the two is that Mutual funds have lots of investors and are considered flexible and liquid.

On the other hand, Hedge funds have only a few investors and are considered neither flexible nor liquid.

Frequently Asked Questions (FAQs)

Q1. What are the different types of Mutual funds and Hedge funds?

The former can be categorized into eight classes: Global Macro, Equity, Relative Value, and Activist, while the latter can be categorized into four classes: Stock, Bond, Index, Balanced, Money Market, Income, Global, and Speciality.

Q2. Why are Hedge funds not considered flexible?

Hedge funds are not considered flexible because they can not be redeemed easily and are considered less liquid. Moreover, they can not be redeemed for at least one-year post-investment.

Q3. What are the fees involved in Mutual and Hedge funds?

Mutual funds are associated with a 12b-1 fee, while Hedge funds are associated with a two percent management fee and a twenty percent performance fee.

Q4. Why is the expense ratio of Hedge funds higher than Mutual funds?

The expense ratio of Hedge funds is more than Mutual funds because the former is associated with performance and management fees. In contrast, the latter is associated with only one type of fee: the 12b-1 fee.

Q5. What are the significant differences between Mutual and Hedge funds?

The significant difference between both funds is that Mutual funds are considered more flexible and suitable for common people. At the same time, Hedge funds are considered less flexible and suitable for only wealthy individuals.