As private investment vehicles that are only open to institutions and high-net-worth accredited individuals, hedge funds are subject to far less regulation than pension or mutual funds. Individual investors must earn a minimum amount of money annually, have a minimum net worth of $1 million and show they have a significant amount of investment knowledge. The minimum investment amount is usually $1 million, and there is frequently a lock-out period, during which the money cannot be withdrawn. The hedge fund's mandate stipulates the assets in which it is permitted to invest; this usually includes stocks, bonds and other debt instruments; real estate; currencies; and derivative products. Hedge funds can be highly leveraged, and they are aggressively managed to deliver high returns.

Mutual Funds

The management objectives of a mutual fund are stipulated in its prospectus, which also lists the instruments in which the fund can invest. This is generally limited to stocks, bonds and money market instruments. Mutual funds have little or no leverage, make far less use of structured products, are less aggressively managed and are regulated by the U.S Securities and Exchange Commission (SEC).

Hedge Fund Investments

There is nothing that prevents a hedge fund from investing in a mutual fund, but the lower risk profile of the latter means it usually generates lower returns. Hedge fund managers who are looking to invest in other funds generally opt to invest directly in another hedge fund or, more commonly, in a fund of funds. This is an investment vehicle made up of a combination of different hedge funds. It offers risk diversification, which is attractive to investors without sufficient capital to invest in a wide variety of hedge funds on their own.

  1. Can mutual funds invest in hedge funds?

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  2. What happens if you don't hedge your investments?

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  3. How do hedge funds determine what assets to own?

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