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Both mutual funds and hedge funds are managed portfolios. A manager, or group of managers, chooses securities expected to perform well, and then lumps them into a single portfolio. Investors buy portions of the fund, and they either gain or lose depending on how their holdings perform. Both types of funds provide diversification and professional management.

That’s where the similarities between mutual funds and hedge funds end.

Hedge funds are managed in a much more aggressive fashion. Unlike mutual funds, hedge funds take speculative positions in derivatives, and they short sell stocks. With increased leverage comes increased risk, but also the chance to gain when the market is falling. Mutual funds are safer, but they won’t take highly leveraged positions.

Hedge funds are only available to accredited investors, who must meet a specific set of criteria to qualify. They are sophisticated investors with high net worth. Mutual funds are easy to purchase with minimal cash.

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