Hedge funds are like mutual funds in some ways. Investment professionals in a hedge fund pool in money from investors to be managed, exactly like the mutual funds do. And, subject to some minor restrictions, investors in hedge funds can withdraw their money as they can in a mutual fund. Nothing else is similar.
In India a number of large hedge funds operate as Foreign Portfolio Investors and these include names like Amansa, Helios etc.
The world of mutual funds is much simpler while the world of hedge funds is a lot more esoteric. Let us understand how are hedge funds different from mutual funds?
Hedge Funds Focus on absolute returns.
Mutual Funds Focus on relative returns. Returns should be higher than benchmark.
Hedge Funds Can invest in any asset class – stocks, bonds, commodities, real estate, private partnerships, – or exotic debt products like packaged sub-prime mortgages.
Mutual Funds Work within a risk controlled and compliance framework set up by the regulator. Hence very risky asset classes are prohibited for investment.
Mutual Fund is essentially a trust which pools the savings of millions of small and medium sized retail investors.
Hedge fund, on the other hand, is a portfolio of investments in which only a few wealthy and qualified investors are allowed to invest.
Hedge Funds can borrow to bet bigger and enhance returns.
Mutual Funds can borrow – but within SEBI guidelines.
Hedge Funds can run highly concentrated portfolios.
Mutual Funds objective is to protect investors’ investment and hence diversification is the key principle.
Hedge Funds is meant for those who are already rich. Hedge funds are open only to ‘accredited investors’ defined as those with big net worth, or income in each of the past two years.
Mutual Funds is meant for people at large providing them with an option of building wealth through equity and debt investments. Mutual Funds allow even small investors to participate.
Hedge Funds are virtually unregulated.
Mutual Funds are heavily regulated because investor safety is the most important requirement.
Hedge Funds cannot market themselves publicly.
Mutual Funds are sold as products to enhance wealth.