Talking about the investments, there are two basic kinds. These are like hedge funds and mutual funds. There are a number of investors who input their money into the fund manager. The investment is of the same kind in different kinds of publicly traded securities. Talking about the mutual fund, it’s a diversified and professionally managed basket of securities comparatively at a low cost.
But looking forward to the hedge funds, these are nothing but unregistered private investments. Those use a diverse range of trading techniques and invest money in securities comprising diverse risks. It is often seen that across India there are many hedge funds which are closed clubs and hence not so clear. These funds operate as foreign portfolio investors either directly or they operate as P-Notes of large FPIs. This is largely different from the mutual funds and is not only about the nature of investors but also the way in which the funds are managed and even the transparency of the report.
The mutual funds are highly regulated as investment companies and are monitored by the U.S. Securities and Exchange Commission. These mutual funds are subjected to strict regulations under the securities act of 1933, securities exchange act of 1934. Coming down to the hedge funds, these are not required to get registered with the SEC and are considered private offering offered to the specific investors that qualify. These are not subject to the same four laws that the mutual funds are with making them significantly less regulated. Most of other investment vehicles, hedge fund managers must abide by a fiduciary standard and are subjected to other laws like those of fraud and insider trading.
Looking to the nature of both the funds. When it’s about the mutual funds, its trust worthy that team to save millions of small and medium sized investors and then invest into equity and debt. Where as in the hedge fund it’s the portfolio of investments in which only a few wealthy and qualified investors are permitted for investments. For a hedge investment the fund structure is quite high and keeps most of the retail investors out of it. the typically the investors in the hedge funds include pension funds, endowment funds, sovereign funds, family offices and high net worth individuals.
One of the very important differences between hedge funds and mutual funds in the way their performance is evaluated. Mutual funds are relative performance funds. The hedge fund managers are permitted to trade on the long side and the short side. Therefore they are judged on the absolute returns that they generate irrespective of the performance of the benchmark indices.
Mutual funds are managed within well laid guidelines and the subjects are under control. There are clear restrictions on the mutual funds when it is about the allocation to derivatives. The hedge funds stands with no such restrictions. They can run a long or short fund or even can bear a short fund. They can also run a fund for any occasional opportunities. The hedge funds are allowed to invest in derivatives, structured products, real estates, global assets and arts.