Consider the following differences between hedge funds and mutual funds:

  1. Hedge funds are more risky than their mutual fund counterparts.
  2. While only "accredited" investors are legally allowed to invest with hedge funds, mutual funds are easily accessible to every investor.
  3. While hedge funds focus on short-term profits, mutual funds focus on long duration profits.

Which of the above statements is/are correct?

Answer: [D] 1, 2 & 3

Hedge funds are managed much more aggressively than their mutual fund counterparts, and hence are more risky. The main aim behind investing in hedge funds is to enhance the leverage – and thus the risk – of the fund. This also means that it's possible for hedge funds to make money when the market is falling. Mutual funds, on the other hand, are not permitted to take these highly leveraged positions and are typically safer as a result. Also, hedge funds are only available to a specific group of sophisticated investors with high net worth, whereas, in case for mutual funds, it is very easy to purchase with minimal amounts of money.

This question is a part of GKToday's Integrated IAS General Studies Module