A:

Hedge funds and mutual funds are very different types of investment vehicles.

The contents of a hedge fund are determined by the hedge fund manager and the investment guidelines set out by the financial institution he or she works for, if there is one. Hedge fund managers are very sophisticated investors who tend to embrace risk as long as there is return potential to compensate for that risk. Depending on the nature of the fund and the manager, it is quite likely that a hedge fund would invest in commodities, especially in a high inflation environment when prices for commodities such as precious metals, energy and real estate usually increase substantially. Investing in commodities in a high inflation environment is usually a wise investment. One caveat here is that hedge funds and hedge fund managers may invest in anything they see as a wise investment.

The contents of a mutual fund are determined by the fund manager and the investment company offering the fund. Mutual funds can be invested in many things such as stocks, bonds and indexes, which may or may not be tied to the commodities market. As with hedge funds, mutual funds invested in stocks linked to the commodities market will perform well in high inflation environments because the price of commodities tends to increase in high inflation environments, although each mutual fund and fund manager is very different in its investment philosophies.

In short, if you are one of the lucky investors whose hedge fund or mutual fund manager has the foresight to predict inflationary changes in the economy, then it is likely that a portion of your investments is dedicated to commodities, or commodity-related stocks.

(For further reading, see our articles Commodities: The Portfolio Hedge and Corporate Use Of Derivatives For Hedging.)

RELATED FAQS

  1. How does the International Chamber of Commerce define the term 'Free on Board' (FOB)?

    Find out more about the International Chamber of Commerce, Incoterms rules and how the International Chamber of Commerce ...
  2. What are the primary factors that drive share prices in the chemicals sector?

    Learn about the primary factors that drive share prices in the chemicals sector. Chemical stocks combine aspects of cyclical ...
  3. What determines if an international trade is Ex Works (EXW) or Free on Board (FOB)?

    Find out more about the Incoterms rules and what determines if an international trade agreement is an ex works or free on ...
  4. What does the rule of 70 indicate about a country's future economic growth?

    Find out more about the rule of 70, what it measures and what it indicates about a country's future economic growth rate.
RELATED TERMS
  1. Agency Swap Program

    A form of securitization whereby single-family residential mortgages ...
  2. Accelerated Return Note (ARN)

    A short- to medium-term debt instrument that offers a potentially ...
  3. Tactical Trading

    A style of investing for the relatively short term based on anticipated ...
  4. Maximum Drawdown (MDD)

    The maximum loss from a peak to a trough of a portfolio, before ...
  5. Gross Exposure

    The absolute level of a fund's investments.
  6. Exchange Traded Derivative

    A financial instrument whose value is based on the value of another ...

You May Also Like

Related Articles
  1. Professionals

    5 Signs That You Have a Lousy 401(k) ...

  2. Economics

    Venezuela: Portrait of a Country in ...

  3. Investing

    Should You Buy Marijuana Stock?

  4. Investing

    These Investments Have Soared in 2015

  5. Economics

    Putin Says Russian Economy Healing - ...

Trading Center