by Dwayne Strocen

Created on: April 19, 2010   Last Updated: April 20, 2010

Hedge funds and mutual funds have many similarities, but many differences exist as well.  Know the benefits of each before making the decision to invest.

In 1949 Australian Alfred Jones was credited with the term "hedge fund".  Historically it derives its name from the use of hedging to manage risk while achieving superior returns.  Today, a hedge fund is an un-regulated investment vehicle designated for sophisticated, also known as the "Accredited Investor".

Mutual funds gained popularity in the 1980's.  Prior to this time, the problem of the small investor was in  obtaining sufficient knowledge to make informed investment decisions, and so the average person avoided stock market investing.  Instead money was held in traditional savings accounts or placed with a bank in a Guaranteed Investment Certificate ("GIC") or Certificate of Deposit ("CD").

What to do.  The small investor was not able to obtain a professional money manager without $10 million or more to start.  But what if he could pool his money with other small investors to reach this minimum threshold.  And so the mutual fund was created to address these exact concerns.

The mutual fund concept was simple, allow the un-sophisticated investor access to the strategies of the professional money manager.  This was done by pooling small sums of money, as little as $20.00 deposited monthly.  In return, the fund company would use professional money managers using professional investment strategies to easily out perform traditional bank savings products.

The mutual fund investor had other problems.  Because they did not understand the nature of the investments made for them, government regulators got involved to protect investor rights.  And so mutual fund investing became regulated and soon took on a life of its own.  Rules were set in place to govern what could be held within a mutual fund and how the investment strategies were marketed to the public.  Even what could be invested and what should be avoided.

While much evolution has transpired since the early days of the 80's.  One thing is for certain, mutual fund investing is all about what it cannot do.  While this article is not focused on these issues, there are some glaring examples the investor needs to know.  In times of market un-certainty, the mutual fund cannot sell and move to cash for safety.  The manager must remain fully invested at all times making the

• 1
• 2
• Next Page >>