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What are the differences/similarities between Mutual Funds,

Hedge Funds and ETFs? Thank you....
What are the differences/similarities between Mutual Funds, Hedge Funds and ETFs?

Thank you.
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6/9/2011
datalog
datalog, Banker
Category: Finance
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Experience: FINRA/NASD 6 & 63, Health, Life & Annuities License, Bank Vice President
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datalog :

What Does Mutual Fund Mean?
An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money mangers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.


 


What Does Hedge Fund Mean?
An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).

Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year.


 


Hedge Fund
For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors. In the U.S., laws require that the majority of investors in the fund be accredited. That is, they must earn a minimum amount of money annually and have a net worth of more than $1 million, along with a significant amount of investment knowledge. You can think of hedge funds as mutual funds for the super rich. They are similar to mutual funds in that investments are pooled and professionally managed, but differ in that the fund has far more flexibility in its investment strategies.

It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return on investment. The name is XXXXX XXXXX as the first hedge funds tried to hedge against the downside risk of a bear market by shorting the market (mutual funds generally can't enter into short positions as one of their primary goals). Nowadays, hedge funds use dozens of different strategies, so it isn't accurate to say that hedge funds just "hedge risk". In fact, because hedge fund managers make speculative investments, these funds can carry more risk than the overall market.


 


 


ETF Definition


Exchange Trade Funds (ETFs) are very much like mutual funds. That is, they are baskets of stock that are bought and sold. They differ from mutual funds in that shares of ETFs can be traded at any time while the host stock market is open. This added flexibility has one drawback in that to trade an ETF, you incur a broker fee.


ETFs then are best traded in relatively large batches that keep the trading fee to a very small percentage or fraction of a percentage of the total cost. They are ideal for picking up stocks when there's an irrational dip in prices since an order can be placed in real-time.


Many ETFs are based on an index making them exchange traded index funds. An index fund is a passively managed collection of stocks that represent a particular region, sector, or asset class. One of the more common index funds is one that closely matches the holdings and performance of the S&P 500. Other common index funds match the S&P 400 (mid-cap) and S&P 600 (small-cap).

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