Hedge Funds vs. Mutual Funds: Which Is a Better Investment? (2024)

FAQs

Hedge Funds vs. Mutual Funds: Which Is a Better Investment? ›

In a nutshell, here are the primary differences: Hedge funds target high-risk, highest-return investments and are only available to certain types of investors. Mutual funds target lower-risk investments that offer more stable returns and are accessible to retail investors.

For conservative investors seeking stability and moderate growth, mutual funds are generally better. Conversely, hedge funds might be more appealing to those with higher risk tolerance and the capacity to absorb potential losses in pursuit of substantial gains.

The key difference between the two is that hedge funds chase the big fish – investments that are high risk, high reward. Mutual funds, on the other hand, stick to the shallows where they can catch smaller but more reliable returns.

Hedge funds are for the wealthy and for institutions that have large blocks of money to invest. They can take bigger, riskier bets on more types of financial instruments. Mutual funds are for individual investors, using safer, well-established strategies for producing returns on investment.

The Disadvantage: High Fees and Expenses

While hedge funds can offer the potential for high returns, they come with a significant downside: high fees and expenses. These fees can eat into investment returns and reduce the overall profit margin.

One of the most profitable hedge funds of all times, Citadel generated $16 billion in profits for its investors in 2022, and earned $65.9 billion in net gains since 1990, making it the top-earning hedge fund ever.

Hedge funds were developed, in part, to help investors manage investment risk. Their market-neutral, or balanced, approach to investing helps seek out positive returns by investing in varied instruments over long- and short-term periods.

Hedge funds are risky in comparison with most mutual funds or exchange-traded funds. They take outsized risks in order to achieve outsized gains. Many use leverage to multiply their potential gains. They also are unconstrained in their investment picks, with the freedom to take big positions in alternative investments.

Hedge funds offer the potential for high returns and diversification benefits, but they also come at the cost of higher fees and less regulatory oversight. As with any investment, you should do your own research to determine whether they make sense for your portfolio.

Growth funds invest in growth stocks and seek capital appreciation. They're generally considered riskier than other types of mutual funds but may provide potentially higher returns.

Who Cannot invest in a hedge fund? ›

You generally must be an accredited investor, which means having a minimum level of income or assets, to invest in hedge funds. Typical investors include institutional investors, such as pension funds and insurance companies, and wealthy individuals.

Higher returns are hardly guaranteed. Most hedge funds invest in the same securities available to mutual funds and individual investors. You can therefore only reasonably expect higher returns if you select a superior manager or pick a timely strategy.

Data shows that hedge funds consistently underperformed the S&P 500 every year since 2011. The average annual return for hedge funds was about 4.956%, while the S&P 500 averaged 14.4%.

a minimum investment of $1 million to $10 million. Despite such high thresholds, through Morgan Stanley, clients can often gain access to funds at much lower minimum investments. As discussed later, investments in single manager hedge funds may be as low as $100,000 per fund.

Hedge funds are investment vehicles known for their potential high returns, but they come with significant risks. These risks include market volatility, leverage and less regulatory oversight when compared with traditional investments.

With the potential for lower interest rates in 2024, it is expected that sustainable assets will gain further momentum within the industry. Similarly, the consistent performance of liquid alternatives seems to offer a safe haven and diversification against interest rate volatility and underperforming equities.

Hedge funds are investment vehicles known for their potential high returns, but they come with significant risks. These risks include market volatility, leverage and less regulatory oversight when compared with traditional investments.

While the S&P 500 lost 19.4% on the year, hedge funds as a whole handily outperformed. According to the Barclay Hedge Fund Index, which tracks the net returns of more than 3,000 funds, hedge funds as a whole shed just 8.2% in 2022.

Hedge funds pay a lot more than private equity firms

Hedge fund pay is higher than pay in private equity. The average hedge fund employee earns $487k in combined salary and bonus; the average private equity professional earns 'just' $263k in salary and bonus. The real difference, though, is in pay per hour.