Mutual funds and hedge funds offer similar and different paths for investors.
Investing strategies vary wildly among hedge funds, and the same can be said for mutual funds, which makes it seem impossible to make an apples to apples comparison. At a basic level, however, hedge funds and mutual funds can be equitably compared; at least enough that the novice investor has a grasp on the differences and similarities. With thousands of different funds of these two types available, there's a good chance you may be contacted at some point by a salesperson. The best ammunition for such an event is knowledge.
Pooled Investments
The first shared concept among mutual and hedge funds is the idea of pooled investments. With both funds, a large pool of investors invest varying amounts of money into the fund, which is, in turn, invested into assets by a fund manager. This "pool" of investment money has a couple of different advantages. First of all, entrance is not denied to those who don't have a lot of money to invest. Purchasing shares in a mutual or hedge fund allows investors with more modest sums of cash to still participate in an investment across a range of stock or bond companies. The second advantage is that the pool of money controlled by a fund gains power through sheer size, sometimes even enough to move the market in a particular asset one way or another.
Publicly Traded Securities
Both types of funds are allowed to invest in any publicly traded security around the world. Stocks are certificates of partial ownership in a company, while bonds are essentially an IOU issued by a government, from the city level all the way up to a country. They accept your money for use in operational matters, and promise to return the money along with an agreed upon percentage of interest at a certain future date.
Professional Management
The person in charge of choosing and executing the hedge or mutual fund's investments is called the fund manager. Ideally, this person should have great knowledge of the factors that drive stock and bond prices, and move in and out of positions profitably. The ultimate goal is to increase the fund's value and return an acceptable return on investment to its participants. The manager should not only have an intimate knowledge of how financial markets around the world function, but how external events like climate, hurricanes and war effect the short and long term value of assets.
Final Tips
While the preceding discusses the similarities between hedge and mutual funds, don't go away thinking there are no differences; there are severe differences that should be thoroughly researched by any investor considering where to put his money. A mutual fund might be the best choice for a certain type of investor, ideally more conservative with an eye toward an upward trending market. Hedge funds play both the long and short side, which makes them appealing to investors more comfortable with risk.
