Whats the difference between a mutual fund and a hedge fund?

Answer 1

A hedge fund is a mutual fund and a mutual fund, in a way, is a hedge fund. Hedges are a distinct class, however, and often engage in fairly risky ventures--that is part of what they are hedging. If you buy a mutual fund as a strategy to diversify your holdings more than you can afford to do on your own, then you are in effect hedging--hoping that the broad range of holdings in the fund will have enough that are going up in value to balance out those that are falling in value. Hedge funds, however, usually require you to be a "certified investor", a fancy way of saying that you have enough money and experience so as to not cry too hard if the hedge fund fails and loses all your money. Hedge funds could spend much of your money on options and index derivatives, leveraging tools that can get pretty complex. Sometimes they fly high and fast. Sometimes they crash and burn. Generally, mutual funds are a way to avoid some of the risk and uncertainty of the market. Generally, hedge funds have an edge on doing better than the general market--if and when they are right.

Answer 2

There are quite a few differences, but the one that will probably be of most interest to you is that most mutual funds are open to most investors with the minimum required investment. Maybe $500 or maybe $2000. Some mutual funds are closed to new investors however because they became too popular.

Hedge funds are only open to very rich investors with a minimum net worth of $1,000,000. They are unregulated and can be very risky. There was one just recently that folded because of a very bad bet on natural gass futures. They lost billions. And that was not an isolated insident.

Large losses in mutual funds are not unheard of either, but the losses tend to not be so sudden and so pronounced.

Answer 3

A mutual fund is designed for the financially unsophisticated, according to the Securities and Exchange Commission.
A hedge fund is designed for sophisticated investors as per the legislation. The SEC defines sophisticated investors as those that are able to understand what they are doing in terms of investing, and the SEC translates this as rich people that pass a hurdle of income or wealth.
The SEC regulates more heavily mutual funds in order to protect the people that for one reason or another do not have the time or ability to understand more complicated and potentially riskier investments.

Answer 4

Mutual funds are more popular and more regulated.

Hedge funds can make money by "betting" that a stock will go down in value. They are riskier, more expensive, and only available to the super wealthy.

Answer 5

Hedge Funds can sell short stocks.