Hedge Funds and Managed Funds What's the Difference?

With the recent spate of news about various hedge funds in crisis we have taken calls from subscribers asking if any managed funds are being affected as well. We though it best to outline the differences between the two and hopefully that will explain the effect of the economic situation on each.

Managed Funds

•  Managed funds are pooled investment vehicles whose performance is measured against a benchmark (such as an Index i.e. XJO / ASX200)
• In good years the fund managers try and outperform the benchmark and in bad years they try and limit losses.
• They traditionally invest in shares, money market accounts, and government bonds - although they can use some securities that are not directly linked to market performance.
• Managed funds are quoted at a price that is calculated daily, as they are open to anybody the cost of a managed fund goes up as it becomes more popular (due to their past profit).
• Managed funds charge a management cost that is typically around 1% per annum.

Hedge Funds

• Hedge Funds are pooled investment vehicles that are not restricted to investing in securities and derivatives.
• They can be active in areas such as real estate, intellectual property, Art, Foreign exchange, futures and infrastructure projects.
• There are several thousand hedge funds in operation globally and they vary greatly in the amount of capital under management.
• Hedge funds do not generally compare themselves against the stock market performance benchmark. Due to the structure of different funds there are varying costs of finance associated. Instead most Hedge funds are only interested in achieving absolute growth.
• Investors can choose to be involved with individual hedge funds or can invest in a fund that spreads the risk through a portfolio of Hedge funds.
• The US is one of the few countries that require hedge fund investors to be high-net worth individuals.
• Traditionally a hedge fund charges a base management fee of 2% and an additional performance fee that can exceed 20%.