The key difference between a hedge fund or mutual fund: There is a fundamental difference between hedge funds and mutual funds. While both are typically investment partnerships uniting funds from many established investors which can be well-off people, retirement funds, annuity funds, etc. the distinction lies in the way the money is invested.
For one hedge funds are usually used as a vehicle for making profits and in some cases they will make their money before they invest it in something else. For example, hedge fund manager A buys bonds at a low price and then resells them at a higher price (hedge fund manager A) to profit from the difference in price and the interest they earn on those bonds.
The major advantage of a mutual fund is that it is made up of different investment products from a single portfolio and so there is less dependence on the profits of the fund and more reliance on the investment products chosen by the fund manager’s ability to pick the best products for the portfolio. When an investor buys a mutual fund he does not have to worry about where the profits go and where they are invested in to create their profits.
A hedge fund manager has to rely on a strategy of buying stocks when the price is low and selling stocks when the price is high. This results in a greater reliance on timing.
The main advantage of the mutual fund is that it makes use of a different portfolio to provide all the benefits of the hedge fund while also relying on a fund manager to choose the most appropriate products to invest in order to generate the maximum profits. There is less reliance on timing and hence less reliance on luck.
You may find the above differences between the hedge fund or mutual fund too technical and boring to read but if you think carefully about the fundamentals of how they work then you may come to realize that they are actually very similar in many ways. Mutual funds will typically require little or no management or no money to start, unlike hedge funds that require a lot of money to open and maintain. In mutual funds, you can usually diversify with a wide range of funds instead of just one. This can also result in lower costs since there is no need to manage or invest in each fund separately.
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