Ever since their creation in 1949 by A. W. Jones (www.hedgefund.com), hedge funds have been widely regarded as a unique and lucrative alternative to investing one's money. Some have seen them as a replacement to the well-known mutual fund, while others believe they are an entirely new domain. Besides defining both the hedge fund and mutual fund, this paper aims to expose the answer to a deeper question: are hedge funds really different than a mutual fund, and if so, how and why? By comparing both financial intermediaries in the areas of structure, strategy, and their respective environments, any uncertainties that may reside within these financial institutions can be resolved.
The most basic question that must first be answered is the most obvious: what is a hedge fund and what is it made of? Hedge funds are partnerships wherein the manager or general partner has a significant personal stake in the fund and is free to operate in a variety of markets and to utilize investments and strategies with variable long/short exposures and degrees of leverage. (Ineichen) In other words a hedge fund is a special type of mutual fund (Mishkin) - which on a very basic level is correct. However, it is crucial to note that mutual funds are referred to as "public", while hedge funds are referred to as "private." This opens a portal of regulatory issues between the mutual fund and hedge fund entities. Mutual funds, where thousands are available in the United States alone, are among the most highly regulated financial intermediaries. Thus they are subject to a very large number of requirements that insure that they act in the best of interests of their "public" shareholders.
To digress only briefly, it is important to mention the importance of regulatory e ...