Funds: Hedge and Mutual- Who and What They Are
Ever since their creation in 1949 by A. W. Jones, hedge funds have been widely regarded as a unique and luring alternative to investing ones money. Some have seen them as a replacement to the well-known mutual fund- while others believe that they are an entirely new domain. Besides defining both the hedge fund and mutual fund, this paper aims to expose the answer to a deeper question: Are hedge funds REALLY different than a mutual fund, and if so, how and why? By comparing both financial intermediaries in the areas of structure, strategy, and their respective environments, it is my hope that I can unmask any uncertainties that may reside within these financial institutions.
The most basic question that must first be answered in this type of paper is the most obvious: what is a hedge fund, and how or what is it made up of? Mishkin describes a hedge fund as a special type of mutual fund - which on a very basic level is correct. But here we must be careful, while mutual funds are referred to as “public” hedge funds are referred to as “private.” This opens a portal of regulatory issues between the mutual fund and hedge fund entities. Mutual funds, and there thousands of them in the United States alone, are among the most highly regulated financial intermediaries. Thus they are subject to a very large number or requirements that insure that they act in the best of interests of their “public” shareholders.
To digress only briefly, it is important to mention the importance of regulatory enactments since the early twentieth century because they have an enormous impact on today’s companies. Four of the most influential acts include the Securities Act of 1933, the Securities Exchange Act 1934, the Investment Company Act of 1940, and
the Investment Advisors Act of 1940. (Hyperlinks to definitions included) While we briefly discussed the implications of some of these acts in class, one of the more important acts, with respect to mutual funds, is the Investment Advisors Act of 1940. Most importantly the act requires the disclosure of their financial condition and INVESTMENT POLICIES when the stock is sold, and continually on a regular basis. On the other hand, hedge funds are not registered, and are, as previously mentioned, private investment “pools.” For the most part they are exempt from the regulation by the SEC under the federal securities laws. Unlike many of the limits imposed on mutual funds, hedge funds are granted a great deal of privacy. They aren’t required to disclose investing strategies, composition of their portfolios or performance besides what the company willingly presents. Undoubtedly this allows hedge funds more of a decisive edge to plan and implement further internal and external tactics to better optimize their institution. [Source: IMF]
In analyzing both hedge and mutual funds, is it also important to look at the advantages, and implicit disadvantages, from...