Hedge funds are extremely popular in comparison with mutual funds. Hedge funds unlike other funds can qualify many trading activities for limited investors. They are flexible in their approach due to the investment options they offer, using financial instruments beyond the reach of mutual funds. Hedge funds uses arbitrage whereas mutual funds are deprived due to SEC regulations and disclosure policy. Mutual funds are not permitted short selling and leverage privileged by hedge funds.
Hedge Fund Are Flexible: Hedge funds profit under all circumstances even if the market is down. They are subjected to relatively lower risk and deliver maximum returns. Mutual funds have taken a back seat as an investment option because of performance measure on parameters like relevant index S&P 500. Mutual funds are bound by restrictions that deprive short selling and derivatives. Mutual funds bound by rules are shackled to outperform and safeguard the assets if the market is down. Hedge funds on the other hand are flexible, not bound by restrictions and reduce volatility. Unregulated hedge funds enhance performance and arbitrage short selling. Hedge fund serve best within niche, special industry that involve a particular expertise.
Skilled Investment Managers: Investors are drifting towards hedge funds over mutual funds and investment managers are also shifting focus towards hedge funds. The most skilled investment managers prefer to serve hedge fund industry because of the remuneration. Hedge fund managers are paid incentives based on performance with a fixed fee. On the other hand mutual fund managers are remunerated with a certain amount of assets under the management. The most skilled professional are drifted to the hedge fund industry because of attractive performance incentive scheme. Unlike mutual funds that require more expertise, talent and skill with investment of work paid in terms of absolute returns.
Not Affected By Equity Markets: Hedge funds are flexible and can protect stocks during market downturn using various hedging strategies. The strategies are varied based on the type and style of invested hedge fund. The prime attribute of hedge funds are that they generate positive returns even if the market is down. Whereas mutual funds are not flexible enough, they get affected with declining market condition. The can only help by shorting a certain amount of stock index futures. Mutual funds future is predicted on the bases of performance of equity markets direction. They fluctuate according to the equity market performance. Hedge fund performance does not rely on equity market and is quite independent. The hedge find performance is not impacted with the equity market.
Hedge Funds Popularity: Hedge funds have grown down the time to a great extent. The growth is estimated by 20% in a single year in accordance with the rate of assets significantly. The amount of stock hedge fund is managing is estimated to be $1 trillion. Hedge funds are open only to wealthy investors and institutions. Hedge funds share more benefits than their counterparts because of their transparency, flexibility and reduced volatility.
Sophisticated and unregulated are the attributes of hedge funds. They offer reduced risk and maximize returns but limited to only rich investors. They differ in flexibility and investment strategies as compared to mutual funds.
Author Bio: Liza brown is a finance head at HF Solutions LLCI. She writes for Hedge Fund New York , a Hedge Fund Service Provider.