Researching hedge funds

The broad investment mandate most hedge fund managers enjoy means that their focus may not be as clearly defined as the investment objective of a mutual fund. It's also possible that their strategy may not remain the same over the investment term, as most managers have the leeway to change direction as they see new opportunities. Further, hedge funds are not required to identify their holdings or provide independently verifiable performance results, though a number of them do so.

This flexibility means that doing due diligence before committing assets and monitoring ongoing hedge fund performance is typically more challenging than with more conventional investments, especially highly regulated ones, such as mutual funds.

Another way hedge funds differ significantly from mutual funds is in their freedom to sell short and thus provide a positive return in bear markets.

Hedge funds		Mutual funds
Loosely regulated		Highly regulated
Fees based largely on performance		Fixed management fees based on size of fund, regardless of performance
Low or no correlation to the market		High correlation to the market
Broad ability to use leverage, long/short positions, and virtually unlimited range of investment strategies		Limited ability to use long/short positions, leverage, and certain other investment strategies
Limited independently verifiable performance information		Legally required complete disclosure of performance information
Largely unrestricted choice of investments, including derivatives		Investments generally restricted to pre-defined market
Open to accredited investors only		Open to virtually all investors

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