Hedge Fund vs. Mutual Fund

I've been rather asked frequently lately "what is a hedge fund?". The following chart does a good job of highlighting the key differences between a hedge fund and a mutual fund. The key is that mutual funds are regulated by the SEC under the Investment Advisors Act of 1940 while most hedge funds are not. In fact, most hedge fund are established as private placements which is why most are only available to "accredited investors". More "40 Act" funds are employing hedge strategies today and are, thus, bringing "hedge funds" to non-accredited investors. They're also bringing lower fees, more transparency and greater liquidity as well. I am a proponent of alternative strategies and have no issues with hedge funds but I do like to use the "40 Act" funds when I can. Differences between Hedge Funds and Mutual Funds Mutual Funds Hedge Funds SEC oversight SEC imposes numerous requirements, including reporting, etc. Minimal SEC registration Required Not required Minimum investment Depends on fund, but is typically less that $10,000 Depends on fund, but is typically $250,000 or more Investor qualifications Anyone can invest as long as a fund's minimum investment is met Must be an "accredited" investor with a net worth of $1 million or more and a consistently high level of income ($200,000+) Reporting requirements Must disclose investment objective and strategy, holdings, performance statistics No reporting required; a fund may keep its strategy and methods secret even from its own investors Investing strategy Typically invest "long" (buys securities outright) A fund may use multiple investing techniques, including complex hedging strategies, arbitrage, leverage, and use of derivatives Investment performance measurement Typically, fund aims to replicate or beat a given benchmark Typically, fund aims to produce positive returns under any market conditions Table Source: Forefield, Inc.