The Differences between Hedge Funds and Mutual Funds - dummies

The Differences between Hedge Funds and Mutual Funds

By Michael Taillard

In corporate finance, funds come in two types — hedge funds and mutual funds — and although they both have the same fundamental principles, each type has some unique traits, processes, regulations, and variations.

The following table gives you a quick look at the main differences.

Hedge Funds Mutual Funds
Strategy Managers have more freedom in their use of investment tools and
an ability to change strategy as they see fit.
Managers must adhere strictly to the strategy described when
the fund was established and must choose from a rather limited
range of investment types.
Fees Hedge funds typically charge a fee based on the performance of
the fund; the better the fund performs in the market, the more the
investors pay in fees.
Mutual funds are highly regulated in terms of the amount they
can charge in fees and the types of fees they can charge. (For
instance, 12b-1 fees are those related to the administrative
functions of the fund and are capped by the Securities and Exchange
Commission.)
Shares Hedge funds pool the assets of the investors collectively and
invest them.
Mutual funds actually sell shares of a pool, which is either
indefinite, meaning that there is no restrictions on the number of
shares issued and that the fund buys back shares as they are sold
by investors, or traded like stocks, depending on whether the
mutual fund is open-end or closed-end, respectively.