Comparison between Mutual Funds and Hedge Funds

Hedge funds provide investors with many investment possibilities and tools that are not available to mutual fund investors. The latter are subject to different regulations by the SEC (Securities and Exchange Commission), which prevent them from applying such strategies as leverage, short selling, derivatives and etc. which hedge fund investors can freely apply.

Hedge funds are preferred investment tool when an investor wants to manage the investment risk to which s/he is exposed. This has resulted from the relative flexibility that hedge funds enjoy.

Different performance incentives contribute to the high success of most hedge funds. Hedge fund investors tend to invest in the hedge fund they manage. As a result they tend to share both the risks and rewards from their activities. This is not the case with mutual fund managers. The award of hedge fund managers is dependent on the positive returns they succeed to generate for their clients, commonly referred to as incentive fees. On the other hand, mutual fund managers are paid on the volume of assets under their management, with no regard to the returns they generate. The hedge fund industry has managed to attract some of the best performing Wall Street professionals thanks to the incentive fee structure.

The hedge fund industry has managed to grow in a rapid rate, which has also been the case with the rate of growth in the hedge fund assets. Even though the mutual fund industry is far larger, the rapid growth of the hedge fund industry reflects its recognized by the investors importance.

Under the conditions of declining equity markets, hedge funds tend to do far better than mutual funds. This means that they are better at the preservation of capital.

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