Final answer:
Hedge funds are lightly regulated, have higher fees, are available to accredited investors, and engage in complex strategies, while mutual funds are heavily regulated, have lower fees, are open to all investors, and typically use more conservative strategies, focusing on specific sectors or mimicking market indexes.
Step-by-step explanation:
Hedge funds and mutual funds are both collective investment schemes that pool money from investors to purchase securities, but they have several key differences.
- Hedge funds are subject to minimal SEC regulation compared to mutual funds, which are highly regulated investment products.
- Hedge funds typically have higher fees, including performance fees on top of management fees, whereas mutual funds usually only charge management fees.
- While hedge funds are available only to accredited investors, meaning those with a high net worth or substantial income, mutual funds are open to all investors, making them more accessible.
- The investment strategies used by hedge funds can be more complex and involve higher risks, including the use of derivatives, leverage, and short-selling. Mutual funds, on the other hand, are often more conservative in their strategies and may focus on a specific sector or strategy such as investing in only large manufacturing companies' bonds or biotechnology companies' stock, and some aim to track an index, like an index fund.
Mutual funds offer investment diversification and potentially high rates of return over time. Although they carry risks, these are generally lower than investing in individual stocks. Mutual funds also offer high liquidity, assuming the fund is readily traded.