Hedge Funds and mutual funds essentially perform with the same economic functions , but Hedge Funds exist because mutual funds do not deliver complex investment strategies. Part of the reason mutual funds do not is that they are regulated. In addition, mutual funds and other institutional investors can gather a lot of funds from investors by promoting simple strategies. Mass selling of hedge fund strategies is much harder because hedge fund strategies are too complex for the typical mutual fund investor to understand. It is therefore not surprising that the largest mutual funds dwarf in size the largest hedge funds. At the end of 2006, the largest mutual fund, the Growth Fund of America from American Funds, had assets under management of $161 billion and the largest mutual fund companies managed more than $1 trillion. In contrast, with a few exceptions, the largest hedge funds managed less than $10 billion. Goldman Sachs managed close to $30 billion in hedge funds and was apparently the largest hedge fund manager.
Hedge Funds are unregulated pools of money managed by an investment advisor, the hedge fund manager, who has a great deal of flexibility. In particular, hedge fund managers typically have the right to have short positions, to borrow, and to make extensive use of derivatives (from plain vanilla options to very exotic instruments). To avoid the regulations that affect mutual funds under the Investment Company Act, hedge funds must limit the number of investors who can invest and they cannot make public offerings. To bypass registration under the Securities Act of 1933, a hedge fund is restricted to having only “accredited investors consisting of institutional investors, companies, or high net worth individuals who can ‘fend for themselves’” (Eichengreen et al., 1998). In contrast, mutual funds generally do not have short positions, do not borrow, and make limited use of derivatives (Koski and Pontiff, 1999).
Hedge Fund:
Hedge Funds in simple words are Pooled fund with specific due date, unfixed rate of return with certain amount of entry for investors who can choose their offered options for investment. Hedge funds strategies are very complicated but by reading this article you will get a glance of hedge funds and their functions.
Hedge Funds are alternative investments vehicle which is using pooled funds that employ numerous different strategies to earn return. Hedge funds may be aggressively managed or use financial derivatives and leverage in both domestic and international markets with the goal of generating high returns. It is important to be noted that hedge funds are generally only accessible to qualified investors as they require less SEC regulations than other funds. One aspect that has set the hedge fund industry apart is the fact that hedge funds face less regulation than mutual funds and other investment vehicles.
Chances are that you personally cannot invest in a hedge fund. Most U.S. investors cannot. Hedge funds are mostly unregulated. These funds can only issue securities privately. Their investors have to be individuals or institutions who meet requirements set out by the Securities and Exchange Commission, ensuring that the investors are knowledgeable and can bear a significant loss. Most likely, how- ever, you personally can invest in mutual funds, which are heavily regulated in how they can invest their funds, how their managers can be paid, how they are governed, how they can charge investors for their services, and so on.
The economic function of a hedge fund is exactly the same as the function of a mutual fund. In both cases, fund managers are entrusted with money from investors who hope that they will receive back their initial investment, plus a healthy return. Mutual funds are divided into two types. Some funds are indexed funds (also known as “passive” funds). With these funds, the managers attempt to produce a return which tracks the return of a benchmark index, like the Standard & Poor’s 500. However, most mutual funds and all hedge funds are active funds. Investors in such funds hope that the manager has skills that will deliver a return substantially better than passive funds.
Hedge Funds have existed for a long time. It is generally believed that Alfred W. Jones, who was a writer for Forbes and had a Ph.D. in sociology, started the first hedge fund in 1949, which he ran into the early 1970s. He raised $60,000 and invested $40,000 of his own money to pursue a strategy of investing in common stocks and hedging the positions with short sales.1 From these modest beginnings, especially since the turn of the century, the assets under management of hedge funds have exploded. At the end of 1993, assets under management of hedge funds were less than 4 percent of the assets managed by mutual funds; by 2005, this percentage had grown to more than 10 percent. In 1990, less than $50 billion was invested in hedge funds; in 2006, more than $1 trillion was invested in hedge funds.