Hedge Funds vs. Mutual Funds
Hedge funds are in some ways similar to mutual funds. Investors choose an investment strategy and give money to a professional money manager.
Hedge funds are also quite different in other ways. First, these investment vehicles are open to only few investors, while a large investment is required. Therefore, these instruments tend to attract wealthy investors seeking to diversify their risks. Second, in addition to management fees, investors share profits with hedge fund managers who, quite often, have invested their own money into the funds they run. Third, hedge funds are quite illiquid, and investors are asked for a minimum commitment period, such as a year or longer, before being able to withdraw their money. Fourth, hedge funds are mostly unregulated.
Quite often, star portfolio managers, traders, and analysts form their own hedge funds. But also, hedge funds are quite easy to form and, as a result, many novices with exaggerated ambitions start their own funds.
In the investment world, the term hedging refers to strategies which reduce risk. The modern hedge funds, however, seek to maximize return and, although risk hedging strategies are used, many risky bets on markets are made by them.
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Most investors are familiar with mutual funds. There are some similarities to hedge funds, but many differences as well. This article, as well as the following ones, portray these differences in more detail.
Hedge fund managers are generally more flexible than mutual fund managers