Hedge-Funds-vs-Mutual-Funds

Hedge Funds vs Mutual Funds

Funds in general, are large sums of money that are saved up for a specific purpose. This money is regularly grown by investing and is professionally managed. Commoners can invest their money in a fund and earn returns, or suffer from losses, depending on the fund’s performance.

Hedge funds:

Unlike the other funds, which benefit most investors, hedge funds are hedged. This means that hedge funds try their best to reduce market risk. Therefore, hedge funds make profits, regardless of the overall market performance. This means that even if there is a global recession these funds will still be making fortunes. Another unique feature of hedge funds is that they are all allowed to invest in whatever asset they want.

Their assets range from stocks (which they short sell), real estate properties, commodities like gold, silver and even Pokémon cards. This sounds good to me, but I can’t invest in a hedge fund without a million dollars in assets (except for the property of resistance).

Why invest in a hedge fund:

The ones investing in hedge funds are clearly aware of the risks involved and where their money is going. The main reason why many wealthy individuals invest in hedge funds is that they want to reduce market risk.

Suppose an entrepreneur runs a successful business and makes millions in revenue. When a global recession hits, the business will be down and so will his income. To provide for the rather lavish lifestyle, the entrepreneur needs to invest in something that does not get affected by the global recession. You may have heard about short selling as well. If not, short selling refers to the type of investing that generates returns when the asset invested in, falls in value. Therefore, hedge funds are one of the best investments for these wealthy individuals.

I don’t know about you, but starting a hedge fund does sound like quite a banger!

The disasters:

From the recent GameStop short squeeze to poor investment decisions, hedge funds have led to plenty of disasters in the market. One particular hedge fund by the name of arches caused a major problem in the financial sector.

Straits Times explains the losses faced by other companies due to the disaster:

The collapse of Archegos, the family office of former hedge fund trader Bill Hwang, has underscored the risks banks are taking with these clients, even when their loans are secured by collateral. Credit Suisse has been the worst-hit so far, taking a US$4.7 billion (S$6.3 billion) writedown in the first quarter.

The lender, one of the biggest prime brokers among European banks, is now weighing significant cuts to its prime brokerage arm in coming months, people familiar with the plan have said.

Mutual funds:

Would you spend a tremendous amount of time, effort and money investing in a stock market? Well, most working individuals don’t even find time to cook for themselves, let alone spend that much time investing. So, what do these people do? It’s simple! They buy mutual funds because they want to be free of all of the hustle. Basically, a mutual fund is a portfolio, managed by professional investors to make a profit. Other than stocks, mutual funds involve bonds, money market instruments and other assets. Also, unlike hedge funds, mutual funds are openly available to every working individual who has enough money to invest.

As mutual funds are available to the masses, they are not permitted to invest in risk-heavy assets and don’t usually make the headlines for financial disasters. They are a comparatively safer and diversified investment.

Why invest in a mutual fund?

Mutual funds are well-diversified and are referred to as the Net Asset Value per share. This means that these funds are directly connected to the global market. If the market does well, the mutual also gains profits. For many, it’s way more profitable just to buy mutual funds rather than a single share of a company.

Investopedia explains this beautifully by saying:

 The average mutual fund holds over a hundred different securities, which means mutual fund shareholders gain important diversification at a low price. Consider an investor who buys only Google stock before the company has a bad quarter. He stands to lose a great deal of value because all of his dollars are tied to one company. On the other hand, a different investor may buy shares of a mutual fund that happens to own some Google stock. When Google has a bad quarter, she loses significantly less because Google is just a small part of the fund’s portfolio.

Mutual funds are also cheaper, compared to individual stocks, though it depends on the stock in question. They also protect against company failures and bailouts, as they include so many different companies and other assets. But unlike index funds, which more or less look the same, mutual funds try their best to outperform the market

Conclusion:

The diversification of mutual funds can also be a disadvantage, along with low returns. Hedge funds can also fall flat on their faces and take other companies down. So, be careful of whichever fund you choose and invest wisely.

What are mutual funds?

A mutual fund is a portfolio, managed by professional investors to make a profit. Other than stocks, mutual funds involve bonds, money market instruments and other assets.

Why should I invest in a hedge fund?

The main reason why many wealthy individuals invest in hedge funds is because they want to reduce market risk. Hedge funds are one of the best investments for these wealthy individuals.

What are funds in general?

Funds in general, are large sums of money that are saved up for a specific purpose. This money is regularly grown by investing, and is professionally managed. Commoners can invest their money in a fund and earn returns, or suffer from losses, depending on the fund’s performance.

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