Major Differences between hedge funds and mutual funds

Management
Mutual Fund: Passively managed to track the market
Hedge Fund: Actively managed to beat the market

Objective
Mutual Fund: Concerned w/ relative return to beat an index (ie. S&P 500)
Hedge Fund: Seek absolute return

Client Base
Mutual Fund: Designed for large number of investors
Hedge Fund: Designed for small number of investors

Investment Strategies
Mutual Fund: Go long (buy an investment hoping it will increase in value)
Hedge Fund: Extensive toolkit: use leverage (buying stocks on margin), sell short, use options futures, and other hedging devices

Primary sources of risk
Mutual Fund: Market
Hedge Fund: Strategy and manager’s skill

Size / Cultural style
Mutual Fund: Large & cumbersome; many between $50B-$100B. Often lack the flexibility to move and act quickly
Hedge Fund: Lean & mean; more nimble; most between $100M-$1B, though hedge funds have begun to grow significantly

Investor Liquidity Mutual Fund: Investors can put in and remove money daily
Hedge Fund: Some only allow money in & out annually; some only every 2-3 years

Fund Marketing
Mutual Fund: Broad access to retail market
Hedge Fund: Limitations to marketing & selling

Fees
Mutual Fund: Asset-based only; Fee based entirely on the size of funds under management-0.5%-1%
Hedge Fund: Asset and performance-based; 1%+20% (1% of funds under management plus 20% of gains)

Taxation
Mutual Fund: No tax at fund level if all income distributed; mutual fund has to distribute 95% of taxable income to investors (Form 1099); investors can either take cash or keep in fund; investor owes taxes either way
Hedge Fund: Pass-through entity, no tax at fund level; most organized as limited partnerships, with investors as limited partners; trade more actively; produce a Schedule K-1 (Form 1065) which may not come in time for April 15 filing deadline