Can Hedge Funds Invest in Mutual Funds?

 

Good question. But to answer it properly it is first necessary to understand the difference between hedge funds (HF) and mutual funds (MF). But of these investment options have similarities in that they both pool the investor’s money across a wide selections of investment opportunities. Hedge funds however usually limit their investors to large institutional types or wealthy investors and they are much riskier and are not covered by the extensive regulation that inhibits other type of funds.

While both of these funds hold stocks, mutual funds stick to investing in publicly traded stocks, but in case of hedge they have no such limitations and can usually buy into any type of investment that the fund manager thinks will generate a payoff for the investors. Also, because hedge funds often invest in private corporations, financial details are not generally available to the general public.

Other similarities and differences include the following:

• Both funds usually invest in bonds at a certain level, since bonds are safer, even though they have a lower return. Like with stocks, MFs invest in only government bonds while in case of other they use private loans to private corporations to accumulate profits for its investors.

• While mutual funds gauge their performance according to one of the major stock indexes (Dow Jones, S&P 500 or NASDAQ), but in case of later they shoot for absolute growth targets without considering the markets.

• Both funds claim to lower risk by spreading out investments across a broad range of securities and investments, since hedge have no real regulation they are able to invest in very high risk, high return investments.

Because of the general freedom that a hedge manager has over the investments that he can make he is free to invest in MFs. Because MFs have a lower return rate however, and expectations of the investors in the HFs are much higher than them, so the fund managers will generally not invest in them. If a certain MF shows a high, steady return, however, some fund managers do sometime take the plunge, at least until the MF’s rise levels out, and will dump some money into the mutual fund to reap the profits.

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