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. 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 >>
  2. 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 >>
  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 >>
  4. What does a hedge fund do?

    Read how hedge funds differ from other investment vehicles and how their investment strategies make them unique and potentially ... 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

    Evaluating Hedge Fund Performance

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

    Hedge Funds Go Retail

    Find out how average investors are breaking into what was once reserved for the ultra rich.
  7. 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.
  8. 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.
  9. Investing

    Fund Of Funds - High Society For The Little Guy

    Like a mutual fund, FOFs provide instant diversity by grouping many hedge funds into one product.
  10. Investing

    Side-By-Side Management May Favor Hedge Over Mutual Funds

    Having your firm handle both investments can spell disaster for your returns.
RELATED TERMS
  1. Hedge Fund Manager

    The individual who oversees and makes decisions about the investments ...
  2. Hedge Fund

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

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

    A type of compensation structure that hedge fund managers typically ...
  5. Selling Hedge

    A hedging strategy with which the sale of futures contracts are ...
  6. Institutional Fund

    A fund that targets high value investors with low management ...
Hot Definitions
  1. IRS Publication 970

    A document published by the Internal Revenue Service (IRS) that provides information on tax benefits available to students ...
  2. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  3. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  4. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  5. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  6. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
Trading Center