Hedge Fund vs Managed Fund: Difference and Comparison

A hedge fund employs aggressive investment strategies, utilizing leverage and derivatives, to generate high returns for sophisticated investors, while a managed fund follows a more diversified approach, aiming to provide steady growth and income through a mix of asset classes, suitable for a broader range of investors.

Key Takeaways

1. Hedge funds are investment funds that use advanced strategies like leverage and derivatives to generate high returns. In contrast, managed funds are investment funds managed by a professional fund manager and are designed to provide investors with long-term growth and income.
2. Hedge funds are only available to accredited investors, while managed funds are available to a wider range.
3. Hedge and managed funds offer investors a way to diversify their portfolios and earn higher returns than traditional investments.

Hedge Fund vs Managed Fund

The difference between Hedge Fund and Managed Fund is that a hedge fund is a joint investment account for remote capital collection. In a managed fund, the money of different investors is pooled together to form a single fund that offers many benefits for the investors.

A hedge fund uses aggressive and diverse strategies to get regular and average returns for its participant investors. A managed fund is managed expertly by a professional fund manager by making different types of investments.

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Comparison Table

Feature	Hedge Fund	Managed Fund
Target Investors	Accredited investors (high net worth individuals and institutions)	General public (individuals of all income levels)
Investment Strategies	Broad range of investment strategies, including non-traditional assets, leverage, and short selling	Primarily invest in traditional assets like stocks, bonds, and cash, with limited use of leverage and short selling
Minimum Investment	High minimum investment, starting at $100,000 or more	Lower minimum investment, or sometimes no minimum at all
Liquidity	Less liquid, with lock-up periods that restrict investor access to their funds	More liquid, allowing investors to redeem their shares more easily
Fees	Higher fees, consisting of a management fee (percentage of assets under management) and a performance fee (percentage of profits)	Lower fees, just a management fee
Regulation	Less regulated, allowing for more flexibility in investment strategies	More heavily regulated, subject to various investment restrictions and reporting requirements
Risk Profile	Generally considered higher risk due to the use of complex strategies and leverage	Risk profile varies depending on the specific fund and its investment strategy, but lower risk than hedge funds
Return Potential	Potentially higher return potential, but also higher potential for losses	Aim to achieve consistent, long-term returns with lower risk than hedge funds

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What is Hedge Fund?

Understanding Hedge Funds:

Hedge funds are private investment funds that pool capital from accredited or institutional investors to employ various strategies in the financial markets with the aim of generating high returns. They are managed by professional portfolio managers or teams who have significant flexibility in their investment approaches compared to traditional mutual funds.

Characteristics of Hedge Funds:

1. Investment Strategies: Hedge funds employ a wide range of investment strategies, including long and short positions, derivatives trading, leverage, arbitrage, and alternative investments such as real estate and private equity. These strategies aim to capitalize on market inefficiencies, price discrepancies, or unique opportunities across different asset classes.
2. Risk Management: Despite the name “hedge,” not all hedge funds focus solely on hedging against market risks. While some hedge funds use hedging techniques to mitigate risk, others embrace aggressive tactics to maximize returns, resulting in higher volatility compared to traditional investment vehicles.
3. Fee Structure: Hedge funds charge a management fee, a percentage of assets under management (AUM), and a performance fee, which is a percentage of profits generated. This fee structure, known as the “2 and 20” model (2% management fee and 20% performance fee), incentivizes fund managers to deliver strong returns.

Regulation and Investor Eligibility:

1. Regulatory Environment: Hedge funds are subject to less regulatory oversight compared to mutual funds and other investment vehicles. They operate under exemptions from certain regulations, such as the Investment Company Act of 1940 in the United States, which allows them to avoid disclosure requirements and leverage restrictions.
2. Investor Eligibility: Due to their sophisticated and sometimes risky investment strategies, hedge funds are restricted to accredited investors, institutional investors, or high-net-worth individuals. These investors are presumed to have the financial sophistication and resources to understand and bear the risks associated with hedge fund investments.

 

What is Managed Fund?

Understanding Managed Funds:

Managed funds, also known as mutual funds or collective investment schemes, are professionally managed investment vehicles that pool money from multiple investors to invest in a diversified portfolio of assets, such as stocks, bonds, cash equivalents, and other securities. These funds are managed by professional fund managers or management teams who make investment decisions on behalf of the fund’s investors.

Characteristics of Managed Funds:

1. Diversification: Managed funds offer investors access to a diversified portfolio of assets, which helps spread risk across various investments. This diversification reduces the impact of individual security or market performance on the overall fund performance, making managed funds suitable for investors seeking a balanced approach to investing.
2. Active Management: Unlike passive investment vehicles like index funds, managed funds employ active management strategies. Fund managers conduct research, analysis, and market assessments to identify investment opportunities and adjust the fund’s holdings accordingly. The goal is to outperform the market or achieve specific investment objectives through skillful selection and timing of investments.
3. Liquidity: Managed funds offer liquidity to investors, allowing them to buy or sell their shares on a daily basis at the fund’s net asset value (NAV). This liquidity feature provides investors with flexibility and accessibility to their investment capital, making managed funds suitable for individuals with varying investment horizons and liquidity needs.

Regulation and Investor Eligibility:

1. Regulatory Oversight: Managed funds are subject to regulatory oversight and compliance requirements imposed by government authorities, such as the Securities and Exchange Commission (SEC) in the United States. These regulations aim to protect investors’ interests, ensure transparency, and maintain the integrity of the financial markets. Managed funds are required to disclose key information to investors through prospectuses, annual reports, and other regulatory filings.
2. Investor Eligibility: Managed funds are open to a wide range of investors, including retail investors, institutional investors, retirement accounts, and other investment vehicles. Unlike hedge funds, which have strict eligibility criteria and minimum investment requirements, managed funds offer accessibility to investors with varying levels of financial resources and investment experience.

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Main Differences Between Hedge Funds and Managed Funds

1. Hedge Funds:
2. Often employ aggressive investment strategies, including leverage, derivatives, and short selling.
3. Aim to generate high returns for sophisticated investors, with higher risk and volatility.
4. Typically have higher fees, including management fees and performance fees.
5. Subject to less regulatory oversight compared to managed funds.
6. Restricted to accredited investors or high-net-worth individuals.
7. Managed Funds (Mutual Funds):
8. Utilize a diversified portfolio of assets, managed by professional fund managers.
9. Focus on achieving steady growth and income for a broader range of investors.
10. Generally have lower fees compared to hedge funds, with no performance fees.
11. Subject to strict regulatory oversight, including disclosure requirements and investor protection measures.
12. Accessible to retail investors with varying levels of financial resources and investment experience.

References

1. https://jpm.pm-research.com/content/28/1/6.short
2. https://www.nber.org/papers/w8173.pdf
3. https://jpm.pm-research.com/content/27/4/97.abstract

Last Updated : 02 March, 2024