When the stock market is doing poorly, talk of using hedge funds tends to increase. Although hedge funds are not mutual funds, people often mistake them as such. The word "hedge" implies defensive management or insurance against bad times, but the truth is
hedge funds come in hundreds of varieties and often use leverage.
|
Mutual Fund |
Hedge Fund |
| Regulation |
SEC
registered
investment vehicles |
Private investment vehicles
(not regulated) |
| Minimum Investment |
Usually small minimum investments |
Large minimum investments required (average $1 million) |
| Investors |
Not limited to the number of investors
and investors can purchase many funds |
Are limited
to 499 investors ("limited partners") who can invest in any one fund |
| Availability |
Available to the general public |
Must be an
accredited investor (net worth must exceed $1 million or individual income
must have been in excess of $200,000, or joint income must have been in excess of $300,000
in
the past two years, plus investor must expect the same level of income in the current
year) |
| Liquidity |
Daily liquidity and redemption |
Liquidity varies from monthly to annually |
| Short Selling |
Maximum 30% of profits from short sales (although
other bear
fund options exist) |
Manager may short
sell often |
| Leverage |
Less leverage |
More leverage |
| Down Markets |
Some funds are defensively managed and others,
like index funds, hold during bad markets. |
Most hedge fund strategies try to hedge against
downturns in the markets, but effectiveness depends on the fund. |
| Definition |
A
public pool of investment capital organized to invest in a portfolio
composed of often predetermined type of securities. |
A private pool of investment capital organized into a
limited partnership to invest in a portfolio made up of a variety of securities |
| Fees |
Limits
Imposed by the SEC |
No
Limits. Hedge funds typically charge high fees,
usually a combination of 1-2% of your assets plus a percentage of the profits
(usually 20%) |
| 