Mutual Funds and Hedge funds are not quite different then why hedge fund generate huge profits and MF do not?

Question

Rate of returns are moderate for Mutual Fund schemes whereas for hedge funds ,it is high.Is it due to lack of controls or some other unknown reason.

Answer 1

When you think of Mutual Funds (MF) in general, you are usually talking about stocks. And you are talking about a MF that is always "in" the market. There is generally no leverage used in a MF.

A hedge fund could be tading in anything, futures commodities, currencies, and it uses leverage. And with a hedge fund, they can trade both sides of any market, and will often go Short.

If a particular hedge fund trades stocks, they will also trade stock index futures to "hedge" their position, or they may use the futures to leverage their position. And they can be Long or Short.

MF's are regulated by rules of the SEC. Most of their holdings must be invested at all times, they cannot use futures, they cannot hedge, and they cannot go short. They are at the mercy of the market. In this respect, a MF can be more risky than a hedge fund.

Any hedge fund will disclose what they trade in and what they are allowed to do, how they manage risk, and how they use leverage. Many hedge funds merely try to mimick an index, and some use hedging (futures) to limit the downside risk only.

You decide how much risk to take by finding out in advance what the hedge fund invests in. Do not listen to people who say that all hedge funds are risky and wild and can incur staggering losses. There are some wild cowboys out there running hedge funds, but it doesn't mean they all are.

Answer 2

Hedge Funds take much higher risks than mutual funds. They can generate much greater profits and also staggering losses. Some hedge funds dealing in natural gas futures have recently lost 70% of their investors money. Hedge funds are only for very large and financially sohisticated investors who can afford to lose. They are not heavily regulated because the folks who are using them are supposed to know what they are doing and the risks they are taking.

Answer 3

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