Each organization aims to grow its revenue at a rapid pace to make more investments. There are various investments, some with a greater profit, but with higher risks and vice versa. Both mutual funds and hedge funds are an investment vehicle that pools money from different investors intending to increase them quickly and in a proportionate manner depending on investors’ appetite. Both are managed by an expert fund manager. The majority of hedge funds are not registered and can be sold only to sophisticated investors. Typically, there are up to 100 or 500 investors to a hedge fund. A manager or management group selects the good performance securities and then sticks them in a single portfolio. Investors purchase parts of the fund and either earn or lose according to the performance of their holdings. Both types of funds offer professional management and diversification. The management of hedge funds is much more aggressive.
In contrast to mutual funds, hedge funds take a specific derivative position and sell short inventories. Increased leverage increases the risk, but also the opportunity to gain if the market drops. Mutual funds are more secure but are not highly leveraged. Only accredited investors who have a specific group of criteria to qualify are allowed to receive hedge funds. They are high net-value sophisticated investors.
Mutual funds with minimal cash are easy to buy. The core fund structure of hedge funds is the same as that of mutual funds. However, only private hedge funds are offered. They are typically known to take higher risk positions for the investor to make higher returns. They can, therefore, employ alternative strategies, leverage, and short-selling. On the whole, hedge funds are often far more aggressive than their counterparts in the mutual fund. Many strive to take cyclical positions globally or to obtain returns on falling markets.
In volatile market periods, some funds may even close redemptions to protect investors from a potential portfolio launch. Overall, hedge fund investors need to fully understand the risk and governance of a fund’s strategy. These terms are not published as a prospectus for mutual funds. Hedge funds are reliant instead on private investment memoranda, limited partnership or operating agreement, and operational subscription document.