One would assume that hedge funds and managed funds are the same thing. This is because both are a managed portfolio of shares. However, the objectives of both are different and this is what sets them apart. Below we outline the differences between a hedge fund and a managed fund.
- These usually have specific objectives such as investment in a specific asset class or investment strategy. You can invest in managed funds that hold equity, bonds or alternative investments.
- You can invest in actively managed funds which means the portfolio manager is trying to outperform the market. Passive funds are funds which usually just track a particular index.
- Managed funds are targeted to the general public as their minimum investment isn’t too high.
- The time horizon with most managed funds is longer than hedge funds as it can be years.
- Managed funds are highly regulated. They must implement the strategy the fund has set to do.
- Managed funds only charge management fees.
- Managed funds allow investors to withdraw funds as any time.
- Hedge funds are mostly actively managed and they try and beat the market.
- They can make money in an up market as well as a down market through short selling or use of derivatives.
- Hedge funds can use borrowed money to invest so they can increase performance but this also adds risk to the investment.
- They require very large initial deposits so they may only be available to high net worth individuals or sophisticated investors.
- These funds charge a management fee as well as performance fee.
- Hedge funds have less regulations than managed funds. There is more flexibility for the hedge fund manager to adjust the strategy if they see it as necessary.
- Hedge funds have a short time horizon.
- They tend to perform better than managed funds.
- Hedge funds may require a minimum period for the investment to be held in the fund.
Lauren Hua is a private client adviser at Fairmont Equities.
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