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. What is the purpose of a hedge fund?

    Find out what a hedge fund is, how it is set up and why it is different than other forms of investment partnerships like ... Read Answer >>
  2. Can mutual funds invest in hedge funds?

    Learn about mutual fund portfolio management techniques and mutual funds' ability to invest in hedge funds, as well as new ... Read Answer >>
  3. Do hedge funds invest in mutual funds?

    Learn whether hedge funds invest in mutual funds. They are permitted to invest in mutual funds but usually avoid doing so ... Read Answer >>
Related Articles
  1. Investing

    Hedge Funds' Higher Returns Come At A Price

    Learn how hedge funds win big gains for investors - and why they sometimes lose.
  2. Investing

    Understanding a Hedge Fund Manager's Worth

    Hedge funds pool investors’ money much like mutual funds. However, they are not as closely regulated as mutual funds, and although their investments may include stocks, bonds and other traditional ...
  3. Investing

    Taking A Look Behind Hedge Funds

    Hedge funds can draw returns well above the market average even in a weak economy. Learn about the risks.
  4. Investing

    The Difference Between Mutual Funds And Hedge Funds

    Both mutual funds and hedge funds are managed portfolios. A manager chooses securities and then lumps them into a single portfolio.
  5. Investing

    Hedge Funds: Higher Returns Or Just High Fees?

    Discover the advantages and pitfalls of hedge funds and the questions to ask when choosing one.
  6. Investing

    Evaluating Hedge Fund Performance

    Most investors are aware of hedge funds, but many don't know the dirty details of this unique investment type.
  7. Financial Advisor

    Why Hedge Funds Are Not Living Up to Return Hype

    Hedge funds are supposed to produce better returns while protecting your investments from the downside. Here's why they are not living up to their purpose.
  8. Managing Wealth

    HF Performance Report: Did Hedge Funds Earn Their Fee in 2015?

    Find out whether hedge funds, which have come under tremendous pressure to improve their performance, managed to earn their fee in 2015.
  9. Managing Wealth

    Will Hedge Funds Be Around in 10 Years?

    Learn why some analysts see hedge funds as a dying breed, especially after a torturous January 2016 for fund managers around the world.
  10. Investing

    Are Hedge Funds Chasing Performance?

    Learn why hedge funds have performed worse than the S&P 500 Index in 2016, and why they may overweight equities to play catch-up in the second half of 2016.
RELATED TERMS
  1. Hedge Fund

    An aggressively managed portfolio of investments that uses leveraged, ...
  2. Blow Up

    A slang term used to describe the complete and abject failure ...
  3. Two And Twenty

    A type of compensation structure that hedge fund managers typically ...
  4. Natural Hedge

    A method of reducing financial risk by investing in two different ...
  5. Buying Hedge

    A transaction that commodities investors undertake to hedge against ...
  6. Double Hedging

    Hedging a position by using futures and options, thereby doubling ...
Hot Definitions
  1. Two And Twenty

    A type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. ...
  2. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  3. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  4. Mezzanine Financing

    A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing ...
  5. Long Run

    A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all ...
  6. Quasi Contract

    A legal agreement created by the courts between two parties who did not have a previous obligation to each other. A normal ...
Trading Center