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Hedge Funds vs Mutual Funds: What’s the Difference?

Do you want to grow your wealth?

Everyone wants to get rich, whether it’s to live out their dreams or take care of their family. While working a 9 to 5 will get you the income you need, no one wants to live paycheck to paycheck. That’s where investments come in, and you’re not only investing in money but also your future.

Studies show that 26% of Americans started investing in 2020, and now might be a great chance for you to start.

For starters, you have the option of hedge funds vs mutual funds. Both are investment vehicles that can help you multiply your wealth. However, the best option for you will depend on how you want to proceed with your investment strategy.

So, what’s the difference between a mutual fund vs a hedge fund? Read on to find out more.

What’s a Hedge Fund?

If you like taking big risks, a hedge fund is for you. Hedge funds pool funds from various investors. They tend to take higher risks to get higher returns.

However, hedge funds are not available to a wide retail audience. Hedge funds are private and available only to wealthy individuals with high net worth. Many hedge fund investors consist of institutional investors.

To take part in hedge funds, you need to have a liquid net worth of over $1 million. Alternatively, you need to have an annual income of more than $200,000.

Benefits of Hedge Funds

Because hedge funds are a private investment pool, they are not seen as regulated investments. This means that investing is more flexible, and strategies are diverse.

Check out these Multi Strategy Hedge Funds, for example! Accredited investors use various techniques like derivatives trading and short-selling. Here are some more of the benefits of hedge funds.

Consistent Performance

Hedge fund investors often have more to lose in case of a loss. Accredited investors must invest at least $10 million. The hedge fund manager has the sole responsibility of managing these funds and all the decisions that go into them.

They also need to maximize the returns as much as they can. Managers do not restrict their strategies, which often gets them more results. They can also choose to invest in any instrument or class as they see fit.

Cautious Decision Making

While hedge funds are riskier and more aggressive in nature, each decision is a calculated one. The hedge fund manager tends to be one of the largest investors in the pool. This makes them more cautious when it comes to making huge decisions.

Hedge funds also have different structures, including the following:

Master Feeder

Master Feeder is one of the most popular hedge fund structures and is often done for tax benefits. The feeder allows investments from investors around the world.

Funds put in by the investors will help to secure the master fund. The fund manager will then use this master fund to purchase more assets.

Fund of Funds

This type of investment strategy focuses on underlying assets under a certain type of fund. This means that the fund manager will invest in other types of stocks.

What’s a Mutual Fund?

Mutual funds are the safest investment pool for new investors. Like hedge funds, you and other investors pool money to purchase assets. However, unlike hedge funds, mutual funds are not private and you will be working with many other investors. 

Mutual funds are not very risky and only focus on stocks that have regular increase rates. Retail investors tend to gear towards mutual fund investments. While it may have limited returns, the principal investment is much more secure. 

Like hedge funds, mutual funds are managed by a fund manager. However, they do not need to include their investment and they only maximize returns as permitted by the law. 

Types of Mutual Funds

Mutual funds allow you to invest in more securities. Here are the different types of mutual funds. 

Money Market Funds

Money market funds are short-term securities with fixed incomes. Some examples of money market funds would include commercial papers, government bonds, certificates of deposit and treasury bills. Money market funds are a safe investment but have a lower potential return. 

Fixed Income Fund

Fixed income funds rely on interest as a form of return. This means that you get a fixed rate of return and don’t have to worry about sudden dips in the market. 

Equity Funds

Equity funds are also known as stock. There are also different sub-funds that invest in other types of stock, like growth stock, small or large-cap stocks, and value stocks. Mutual fund investors can also invest in a combination of these stocks. 

Balanced Funds

Balanced funds are a way to get high return on stocks and mitigate risks at the same time. Thanks to fixed-income securities, a higher rate of return is almost always a guarantee. 

Index Funds

As the name suggests, index funds will track the performance of a certain index. This type of mutual fund is more popular due to the low cost management. 

Specialty Funds

Specialty funds invest in certain parts of the market. This may include industries like healthcare, energy, or technology. 

Benefits of Mutual Funds

The fund managers who are in charge of mutual fund pools are professionals who dutifully keep track of the portfolio. The fund managers can also dedicate more of their time to choosing assets than those of a retail investor. 

As mentioned prior, the nature of mutual funds allow the pool of investors to dip in a more diverse set of investments. Mutual funds often invest in multiple stocks or bonds and not only one. While the rate of return may be lower for each of these, they have a high chance of success when put together. 

The Difference Between Hedge Funds vs Mutual Funds

Now you know the differences between hedge funds vs mutual funds. Each type of investment pool has its benefits depending on your goals and how much you’re willing to risk. Use this guide and start investing in your future today! 

Do you want to learn more about the best stocks to invest in? Check out our other blog posts to discover the latest news on stock trading. 

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