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.)

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