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Originally Posted by Olav23
Mutual funds can short-sell (I think up to a maximum of 30% of profits or some arbitrary number). There are also mutual funds from Rydex and Proshares that return the inverse of some indices, so I am not sure how they can get away with this. Maybe they never profit more than 30%?  They can also use leverage, but to a much smaller degree. Some funds that seem to blur the line between hedge and mutual:
PCRIX - profits from commodity instruments
Rydex Inverse Dynamic S&P 500 - Inverse fund that seeks 200% of the daily performance of the S&P 500® Index.
So, it seems to me the only difference between a hedge and a mutual fund is basically disclosure and SEC registration. It seems sorta like people paying for the exclusivity of being in a select club, and proving they have a high net worth.
I guess the argument can be made that it is another asset-class, and overall provides diversification benefits since it has more of a range of investments it can make, but it just doesn't seem like a prudent investment for a person with "just enough" to get into a hedge fund expecting to beat the market overall.
And sure, you can make the arguments that there are the T Boone Pickens of the world, just as you can say there are Warren Buffets. But, try to predict the next Pickens or Buffet, and if you find them in advance, please let me know! |
main difference is that you can start a hedge fund to invest in any way you want. from stocks, to derivatives to buying apartments in Berlin. anyway you can think of making money you can do it and change asset classes as you want.
with a mutual fund there is a charter to follow with all kinds of limitations as to which assets the fund can buy and how much cash it can hold. I can sell my entire 401k with a click of a mouse if I think the market is going to tank. Most mutual funds have to keep the depreciating assets and take the loss until they come back.
last few years commodities have been hot and hedge funds made a ton of money. mutual funds were left out since almost all of them are not allowed to buy commodities. why do you think you don't hear so many horror stories about CALPERS and other pension systems that were throught to be on the brink of collapse after the Nasdaq bubble? because they are all big investors in hedge funds and private equity and have made a ton of money in the last few years
with hedge funds and private equity you don't need to find the next Peter Lynch or whatever since your investments are rolled over into what is currently making money rather being stuck in one asset class. a lot of funds made a ton of money doing no brainer things like the yen carry trade with leverage
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