Investors always try to diversify their portfolios through various techniques. This diversification may come in the form of investing in several asset classes or markets. Among the top investing strategies that investors use for diversification are investing in hedge and mutual funds. Both of them have similar characters. However, they are also different from each other for several reasons.
What are Hedge Funds?
Hedge funds represent a pool of funds from investors for alternative investments. Hedge funds employ different strategies to earn active returns for their investments. Hedge funds can use aggressive or diverse strategies to generate steady returns above the market rate. Usually, hedge funds consist of a few investors but have a healthy base.
Usually, large investors with a high-risk tolerance prefer investing in hedge funds. It's because these funds may come with higher risks. However, they can also generate significant results for investors. Each hedge fund may come with its own requirements on who can invest in the fund pool. There is a manager who actively manages the funds, responsible for employing various strategies.
Hedge funds are similar in their structure to mutual funds. Both represent a pooled fund structure actively managed by a fund manager. However, hedge funds employ more aggressive strategies to generate returns. These strategies may also come with significantly higher risks, which mutual fund investors may not be willing to accept.
Hedge funds offer their investments privately. Therefore, it requires them to include only accredited investors to build their fund structure. These investors usually come with advanced knowledge of financial market investing. These investors also relinquish the standard protection against losses offered by mutual funds to earn more.
What are Mutual Funds?
Mutual funds also represent a pool of funds collected through investors. They are prevalent in the investing world. There is a fund manager that looks after the pooled funds and make investing decisions. The fund manager is responsible for actively managing funds and generating returns for investors. Usually, the fund manager has investment objectives that they must actively manage.
Mutual funds are suitable for smaller investors, giving them access to a diversified portfolio of stocks. With mutual funds, every investor has the option to diversify their portfolio. Similarly, investors that don't want to manage their funds actively can use mutual funds to earn passive income. Through mutual funds, fund managers invest in various securities. They track its performance through the change in the fund's total market cap.
Unlike hedge funds, the performance of mutual funds isn’t private. Usually, they are a part of larger investment companies, having several mutual funds. There are various types of mutual funds that investors can use. These include Equity Funds, Money Market Funds, Fixed-Income Funds, and many more.
Mutual funds come with lower costs to investors with decent returns. However, they can't replicate the high amounts of returns that investors get through hedge funds. Nonetheless, mutual funds also come with lower risks for investors. For most investors, investing in hedge funds is not an option due to the requirements. However, mutual funds are always available.
Conclusion
For a diversified portfolio of investments, investors can either choose hedge or mutual funds. Both represent a pool of funds managed by a fund manager. However, hedge funds are high-risk investments, which accompany high-returns. In contrast, mutual funds are publicly available and can range in their risks and returns.
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