Democratic Management Style

Sample Comparison Essay on Mutual Fund vs Hedge Fund

Mutual Fund vs Hedge Fund

Mutual funds and hedge funds have a wide range of differences. These differences are largely based on the fees charged, including pricing, leveraging and liquidity approaches applied. Other differences are determined by the level of regulation each is subject to and the attributes of their typical investors who employ all the available investment channels. In discussing these differences, it is important to note that America’s mutual funds are the most strictly regulated products in the world. For this reason, the funds are subject to various requirements to ensure that operate with the interests of shareholders at heart. On the other hand, hedge funds are subject to limited regulations. This essay gives an in-depth analysis of some of these difference and existing points of convergence.

As mentioned in the introduction, regulatory requirements give their leading distinctions.  For instance, for mutual funds to operate in the United States, they must register with the U.S. Securities and Exchange Commission where they are exposed to thorough regulation. The National Association of Securities Dealers, Inc. is in charge of adverts and sales materials. Additionally, the law requires mutual funds to have directors who oversee various policies of the fund and procedures. In almost all the cases, directors must be independent from the management to realize the goals and allow oversight without interfering with the running of the fund. The regulation of mutual funds is anchored in the Investment Company Act, which standardizes structure and operation of the fund.

On the other hand, the law does not require hedge funds to register with the U.S. Securities and Exchange Commission, implying that they are not subjected to rigorous oversight as mutual funds. Here, they offer their securities in private offerings, which are not registered under the 1993 Securities Act. Additionally, the law does not require hedge funds to submit regular reports as stated in the Securities Exchange Act of 1934. Moreover, hedge funds are not allowed to engage in fraud related activities and their managers have equal duties of trustees as compared to other advisors.

Another difference between mutual and hedge funds is based on fees. For example, investments of mutual funds are subjected to fiduciary duty, which is imposed by the federal law. This is however dependent on the compensation that is guaranteed from the fund.  NASD rules also regulate mutual funds sales and several distribution fees. Importantly, the law demands detailed disclosure of mutual fund fees and expenses. This information is supposed to appear in a simplified format for easy understanding and interpretation by the investors. On the other hand, the law does not limit the fees that hedge fund can charge its investors. In actual sense, it is the responsibility of the hedge fund manager to levy asset-based fee and performance. It is important to note that some of these funds have front-end sales taxes.

Concerning leveraging practices, the Investment Company Act prohibits a mutual fund to leverage or borrow based on the value of securities available in the portfolio. In general the U.S. Securities and Exchange Commission requires funds to cover their positions whenever they engage in investment techniques like short selling, use of options, futures etc. On the other hand, hedge funds engage in high level of leveraging.

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