While a hedge fund manager and a portfolio manager both manage a large investment fund, they are part of two very different organizations. A portfolio fund is a regular investment that is generally easier to understand and available to all investors. Hedge funds are riskier; they can create huge returns but similarly large losses. Because of this risk, generally only investors who have either a net worth of $1 million or who earned an income over $200,000 a year over the past two years can invest with hedge fund managers.
A portfolio manager is much more closely regulated than a hedge fund manager. A regular investment fund needs to register with the U.S. Securities and Exchange Commission. On top of this, the portfolio manager must let everyone know his portfolio's investments and strategy in the fund's annual prospectus. A hedge fund manager has fewer restrictions. Hedge funds are less monitored by the government. They only need to register with the SEC if they manage over $150 million in investments. They also have more investment options and can take on more risk.
Because of stricter regulations, a portfolio manager needs to use a simpler trading strategy than hedge fund managers. Most investment funds plan for the long term and invest with a focus on growth. They don't trade as much based on the daily swings of the stock market. Hedge fund managers are more active. They try to predict short-term changes in the stock market so they can make money on upswings and downswings alike.
Hedge fund managers generally charge higher fees than portfolio managers. This pays for their more complicated and active trading strategy. Hedge funds charge an annual fee on the fund assets plus another fee on all profits. For example, a fund could charge 2 percent a year for fund management plus another 20 percent of profits. If a hedge fund makes money, its manager gets a piece of the action. Portfolio managers generally charge a much lower fee. According to the SEC, the average mutual fund charges about 1 percent per year for managing the investments, and doesn't take any extra profit from investment gains.
Hedge fund managers often attempt to make much higher-than-average gains for their clients. To hit this goal, hedge funds need to build more risky portfolios. One way hedge fund managers increase returns is by leveraging their portfolios. This means they temporarily borrow money from the stock market so they can put more down on their investments. If things go well, the hedge fund gets huge profits. If the hedge fund manager bets wrong, his fund gets hit with big losses. A portfolio manager uses a stabler approach and doesn't use leverage. Therefore, he typically won't see the same swings in annual returns.
- John Foxx/Stockbyte/Getty Images
- Managed Futures Vs. Hedge Funds
- Hedge Fund Vs. Asset Management
- Distinctions Between Alternative & Traditional Investments
- Why Do Closed-End Mutual Funds Trade at Discount?
- Pros & Cons of Fee-Based Investment
- Asset Allocation vs. Market Timing
- Index Trackers vs. Picking Shares
- Mutual Funds vs. the Stock Market