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Introduction
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uninitiated get a rough idea of what a hedge fund can do. Of course,
there are lots of rules that a hedge fund must observe, and hedge funds
are organized differently from mutual funds. The distinction loses mean-
ing as mutual funds have been given broader investment rules over time.
Recently, U.S. regulators have been pressing to tighten the regulation of
hedge funds. Nevertheless, there are some consistent differences between
mutual funds and hedge funds.
Fees
Most mutual funds charge a management fee but not incentive fees. Mu-
tual funds may charge management fees from less than 0.25 percent up to
several percent of assets under management. Hedge funds also charge man-
agement fees, usually between 1 percent and 2 percent of assets. Mutual
funds usually charge no incentive fee, but hedge funds charge incentive fees
of 20 percent of profit or more. While mutual funds may be sold with no
sales charge (called no-load mutual funds), many are sold with commis-
sions of 5 percent of assets or more. Mutual funds may also assess other
sales charges called 12b-1 fees. In contrast, hedge funds generally don't
charge sales commissions.
Leverage
A small number of mutual funds borrow to carry long positions in excess
of capital or to carry short positions. One mutual fund, Northeast In-
vestors Trust, bought corporate bonds as long as 30 years ago using bor-
rowed funds to increase the return on the fund. Most mutual funds use
debt only to provide short-term liquidity to accommodate withdrawals.
Mutual funds also use derivative instruments in lieu of investing in cash se-
curities, not to create leverage.
In contrast, a survey conducted by Van Hedge Fund Advisors Interna-
tional, LLC in 1997 reported that 70 percent of hedge funds used lever-
age.
1
During the time of the study, some fixed income hedge funds ran
positions 70 times their capital or higher.
Transparency
Mutual funds publish quarterly income statements and balance sheets at
least quarterly. The balance sheets aggregate assets so that investors cannot
see details of individual positions. Nevertheless, mutual funds publish de-
tailed portfolios annually, albeit with substantial delays.
Hedge funds have typically refused to disclose positions or trade de-
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HEDGE FUND COURSE
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