Differences between Hedge Funds and Mutual Funds

Hedge Funds are extremely flexible in their investment options because they use financial instruments generally beyond the reach of mutual funds. The latter have regulations and disclosure requirements, which largely prevent them from using short selling, leverage, concentrated investments, and derivatives. These flexible options, which include the use of hedging strategies to protect and limit the downside risk, gives Hedge Funds the ability to manage investments better.

The strong results can be linked to performance incentives in addition to investment flexibility. Unlike many mutual Fund managers, Hedge Fund managers are usually heavily invested in a significant portion of the Funds they run, and share rewards as well as risks with investors. ‘Incentive fees' remunerate Hedge Fund managers only when returns are positive, whereas mutual Funds pay their financial managers according to the volume of assets managed, regardless of performance. This incentive fee structure tends to attract many of the best practitioners and other financial experts to Hedge Fund industry. In the US, the following differences can be measured between Hedge Funds and mutual funds