What is The Difference Between a Hedge Fund vs. Mutual Fund?

When considering a hedge fund vs. mutual fund, it’s important to understand the key differences, especially for those who aspire to a career in business. The differences include availability, strategy, objective, fee structure, regulation and liquidity.  

Knowing the difference between a hedge fund vs. a mutual fund is part of the financial education business leaders need to excel. Understanding these differences is part of what students learn in an online MBA degree program.  

Key Differences in a Hedge Fund vs. Mutual Fund 

Both Hedge funds and mutual funds are investment vehicles for the stock market. And like any investment vehicle, the plan is to make a good profit. However, beyond these two general points, these two are quite different. 

Availability  

Mutual funds are popular with 401K plans and individual investors because you can buy in with very little capital. Hedge funds, on the other hand, require large investments and are used only by the biggest players on the market. Some hedge funds require millions of dollars to buy in. 

Strategy  

People pick mutual funds as a safe, slow-growing financial instrument, usually for retirement. Hedge funds tend to have a more aggressive strategy. Most investors choose a hedge fund because of the talent of the fund manager, while mutual fund success depends mostly on the direction of the market. 

Objective  

Mutual funds represent a safe investment for people with reasonable financial goals, such as (for example) earning around 7% a year toward building a retirement nest egg. Hedge funds strive to make a maximum profit every quarter. Investors aren’t concerned with the direction of the market; they expect to make a profit no matter what happens. 

Fee Structure  

Mutual funds set limits on the fees they charge. Hedge funds often have no fee and typically are set in relation to the amount of money the fund makes. 

Regulation  

Knowing they are the typical investment vehicle for millions of people, the Securities and Exchange Commission regulates mutual funds tightly. They are subject to many different federal regulations and IRS rules. Hedge funds don’t register with the SEC and operate under fewer regulations. 

Liquidity 

People can buy and sell shares in mutual funds every day. Hedge funds, which require a larger investment, often have a “lock up” period where investors are restricted in what they can withdraw, particularly in the first two years.