Investing 101: What is a hedge fund and how is it different from a mutual fund?

June 10, 11:48 AMBusiness and Finance 101 ExaminerAndy Samuels

Previous Next

Comment Print Email RSS Subscribe

Subscribe

Get alerts when there is a new article from the Business and Finance 101 Examiner. Read Examiner.com's terms of use.

Email Address   Include other special offers from Examiner.com Terms of Use

Photo: copyright Photoxpress.com

Having migrated away from their namesake, hedge funds no longer  focus primarily on “hedging” (attempting to reduce risk) because hedge funds are now focused almost blindly on one thing: returns.

Having been referred to as “mutual funds for the super rich” by investopedia.com, hedge funds are very similar to mutual funds in that they pool money together from many investors. Hedge funds, like mutual funds, are also managed by a financial professionals, but differ because they are geared toward wealthier individuals.

Hedge funds, unlike mutual funds, employ a wider array of ivesting techniques, which are considered more aggresive. For example, hedge funds often use leverage to amplify their returns (or losses if things go wrong).

The other key difference between hedge funds and mutual funds is the amount of regulation involved. Hedge funds are relatively unregulated because investors in hedge funds are assumed to be more sophisticated investors, who can both afford and understand the potential losses. In fact, U.S. laws require that the majority of investors in the fund are accredited.