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Compare hedge fund and exchange traded fund
People have different goals in terms of investments, some will go for financial securities and some may go for extra income and others may save for retirements etc. to reach their goals people invest in different options like hedge funds, Exchange traded funds, bonds etc.
In this, we will compare hedge funds and exchange traded funds.
Hedge funds
These are private portfolio investments, to generate returns it uses management strategies and risk investments. These are open to limited persons and preferences will be given to high net worth investors. Leverages, even short selling and options are different investment strategies used in hedge funds.
Characteristics
- Only qualified people who are ready to handle potential risk in hedge funds are eligible for hedge funds.
- These funds cover a wider range of investments than others (derivatives, stocks, real estate etc.)
- Based on strategy, hedge funds can borrow capital based funds.
- Not registered.
- Private investment partnerships.
- Different market strategies and investments are used.
- Risks involved in hedge funds are longer periods of investments and sometimes use of leverage can cause huge loss.
Exchange traded funds
These are listed funds and traded on securities exchanges and track returns of financial instruments. It tracks bonds, commodity, index etc. exchange traded funds prices may vary in a day. These are suitable for people who will look for cost effective and more liquid investment options. In this choice for diversification is available
Types of exchange traded funds are as follows −
- Industry exchange traded funds (covers banking etc.)
- Currency exchange traded funds (used to invest in foreign currency)
- Bond exchange traded funds (covers local, state, government & corporate bonds)
- Inverse exchange traded funds (short selling stocks)
- Commodity exchange traded funds (gold, crude oil etc)
Benefits of exchange traded funds are as follows −
- Can access variety of stocks
- Less broker commissions
- Can choose specific industry
- Investment risk can be managed through diversification
Disadvantages of exchange traded funds are as follows −
- If he invests in a single industry then diversification is limited.
- Lacks liquidity.
- High fees for actively managed exchange traded funds.
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