Monday, May 26, 2008

Should You Invest in a Hedge Fund or Mutual Fund?

You want to focus on your career, so you don't have time to research individual securities to invest in. But you want returns that are higher than the GIC rates banks are offering. One decision you might be faced with is whether you should invest in a hedge fund or a mutual fund.

Alfred Winslow Jones came up with the concept of hedge funds in 1949. His strategy was simple: buy undervalued stocks while simultaneously selling overvalued stocks. That way, even if the entire market drops, you're hedged! Today there are many flavours of hedge funds, but for the most part, they seek to "hedge" for atleast some of the possible risks inherent in investing.

Some Differences Between Hedge Funds and Mutual Funds

Because many hedge funds "hedge out" market risks, they are often judged by their absolute returns, while the mutual funds are judged against an index. Hedge fund managers also tend to have substantial investments in their own funds as compared to mutual funds, which lends itself to an alignment of interests between investors and the managers of their money. The fee structure also tends to be different, with hedge funds tending to reward their managers on largely performance-based metrics, rather than simply on assets under management, which is common for mutual funds.

To hedge or not to hedge? As an investor, it will depend on your individual preferences.

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