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Hedge Funds vs. ETFs

A visual representation of the rise and fall of value trends of a hedge fund.

Like many people right now, you’re probably wondering what moves are best to make in terms of financial stability. Often, investments are great ways to make some extra money and to build experience within the financial trade industry.

Unfortunately, there are so many different types of investments and funds that it can be difficult to understand which is best for your money. Specifically, we’re talking about comparing hedge funds to an ETF.

When we compare hedge funds to an ETF, their differences and similarities become clear as day, helping you determine which investment strategy is going to be best for your future. To help you make this decision, we’ve directly compared hedge funds to ETFs to show you where they stand on myriad different topics.

What are Hedge Funds?

First, let’s start with just basic definitions of these terms. Hedge funds refer to investment funds in which myriad financial partners pool their money to gain assets and make a profit.

Hedge funds are not as easily accessible as other investment opportunities, as they are really only available for those who have established themselves in the industry. Typically, you’ve already established quite a bit of wealth doing this type of trading.

Having a privatized investment strategy such as this one can be both extremely rewarding and extremely risky. While you have the opportunity to make a lot of fun and some serious connections, you’re also putting yourself at high-risk to lose it all.

Deciding on whether or not this is worth it is totally up to you. Especially when other funds, like ETFs, aren’t nearly as risky (though they might not be as rewarding, either).

What are ETFs?

ETFs are Exchange Traded Funds that work to track a specific commodity, bond, or index. Basically, you’re buying a portion of that commodity, bond, or index, and then tracking that index over a period of time.

Similar to a stock, they trade on the exchange: this means that their prices are going to fluctuate as the day goes on, depending on who is (or isn’t) interested. Usually, these types of funds are sought-after by individual investors who can buy or sell whenever they feel necessary.

In fact, ETFs are continuously bought and sold throughout the day on the stock market by practically anyone who desires. Because these funds are highly liquid, they’re becoming much more popular each and every day. They’re incredibly cost-effective and not as horribly risky as some other options on the market.

Similarities and Differences

When we directly compare hedge funds to ETFs, they’re both incredibly different. But, they do share a few similarities that are worth noting.

To start with the similarities, both of these funds act similarly to the way that stocks do, making them traditional and easy to understand. Both also come with some hefty fees when it comes to utilizing them, though we will get more into that later.

Lastly, really the only other thing these two have in common goes back to how they act. While hedge funds can’t act like ETFs, ETFs can act like hedge funds, delivering all sorts of diverse investment strategies like short/long or market-neutral. But, that’s as far as it goes similarities wise. Simply put, the two are quite different.

We will get more into the nitty-gritty later, but when it comes down to the differences between hedge funds and ETFs, the biggest difference lay within their accessibility and their risk/reward factors. While one investment may be much more accessible than the other, it may not pose nearly as much of a reward, and vice versa.

Below, we’ll start comparing hedge funds to ETFs directly in terms of fees, risks/rewards, and accessibility factors.

A woman monitoring the graphs and charts on her computer.

All About Hedge Funds

Like we mentioned above, hedge funds are privatized investments that require multiple investors pooling their assets. This is a wonderful option for those looking to diversify their financial portfolio as well as experience some flexibility.

Fees

As we hinted at earlier, both hedge funds and ETFs have pretty high fees, unfortunately. With hedge funds, you have to take into account your management fee, which pays for the “operation” itself, and the performance fee which funds the manager themselves.

Management fees tend to be about 2% while performance fees can be around 20%. Unfortunately, because mutual funds are not public investment opportunities, these private investors can tweak these numbers as they see fit.

Occasionally, you might find a hedge fund that doesn’t require a management fee. While this is great, you will likely find that your performance fee is much higher than the standard 20%, you’re still losing quite a bit of your profit.

However, investors just assume that those investing in hedge funds are wealthy and, therefore, can afford these fees with ease. Plus, the Securities and Exchange Commissions don’t pay much attention to hedge funds at all, so there is an impressive amount of flexibility that goes on with trading, pricing, and so forth.

Risks/Rewards

With high risk comes high reward. Hedge funds are some of the riskiest financial investments you can make, as you’re putting significant amounts of money in concentrated areas.

This can result in huge losses if you’re not careful, as well as damages to partners and partnerships. But, this is more than worth the risk for some, as you can come out extremely successful as well.

Again, this is why these hedge funds are not open to the public: they’re meant to only be utilized by the most professional investors out there. But, even the most professional investors still experience the hard-hitting loss of these types of funds every once in a while. You just have to be prepared and decide whether the risk is worth the reward or not.

Accessibility

As we’ve been mentioning this whole time, hedge funds are not very accessible funds. They are not available to the general public for investing whatsoever.

In order to invest in a hedge fund, you have to have a credible, reliable history of financial trading to prove adequate wealth and knowledge. Once again, this is why they are so risky: these money values are nothing to be laughed at, and they need to know that you have enough to be risking it.

If you’re someone who has been in the financial trade sphere for quite some time, and you’re more than familiar with the risks involved, you may be able to get your hands on (and your money in) some hedge funds.

But, you must be certain that you have the wealth and knowledge to do so; otherwise, this private type of trading simply isn’t for you. If it is, that’s only more reassurance that you’ll be working alongside some of the best of the best–just like you.

Someone monitoring the numbers of the stock market.

All About ETFs

Now, let’s get into the nitty-gritties of Exchange Traded Funds. As a refresher, ETFs work as stocks do, are highly liquid and available for the public to enjoy. For more details about ETF fees, risk/rewards, and accessibility, though, keep on reading.

Fees

ETFs that are actively-managed have shown to have much higher fees than other types of investments. Typically, with these types of funds, you are looking at paying about expensive ratios of 0.44%, costing you $4.40 for $1,000 that you invest. Not bad, right?

Unfortunately, actively-managed ETFs have expense ratios that are significantly higher than the national average, leaving you paying more than you might have bargained for.

It is important to keep in mind that only actively-managed ETFs, or ETFs that have teams working on crafting decisions, have these hefty fees. The average typical ETF fee, as we mentioned is around $5 per $1,000, though this can still get a bit pricey depending on how much you’re investing. Usually, though, this is a relatively doable cost for investing in some low-risk funds.

Risks/Rewards

Like we just said, ETFs are generally considered to be low-risk. These types of funds typically do not cost nearly as much as others, and they’re highly liquid. You can buy and sell at practically any time of the day, and these even boost diversification within your portfolio similarly to how hedge funds do.

Of course, there are still risks involved when using ETFs, especially when it comes to excess fees and taxation. And, without high-risk, it is almost impossible to receive high-reward from ETFs. While you can easily make money investing in these funds, the sums of money that you make won’t be nearly as substantial as if you invested in some of the riskier funds out there.

But, if you don’t have the money to risk, ETFs are a great place to put it instead. Like we said, you can buy and sell practically whenever you feel like it, granting freedom that hedge funds could never bring.

Accessibility

ETFs are incredibly popular not only for their ease but because of their accessibility. These funds are available for everyday people to buy and sell, and you don’t have to have years of trading experience to do so.

Rather, if you’re interested in investing, you simply can with ETFs. Not to mention, these types of funds grant you access to so many different types of stocks across industries you may never even heard of.

Having this kind of accessibility can do wonders for your portfolio, and it can also help you find exactly what you want to be investing in and how. (As well as what you don’t want to be investing in.)

All in all, ETFs grant a great opportunity for growth in this industry, and they make it somewhat easy, too. If you’re just getting started in the world of investments, looking into ETFs may be your best option by far. As we established, some funds aren’t even available for everyday people, so take advantage of the ones that are.

A woman checking the latest numbers of her hedge fund on her phone.

Making the Right Choice

So, which one is better? When it comes to comparing hedge funds to ETFs, to say one is better than the other would be subjective. These two funds are simply just different. Hedge funds and ETFs appeal to completely different people, and that’s okay!

There’s an investment strategy out there for every person, you just have to take the time to decide what is best for you. Low-risk, high-risk, concentrated, or solo, it all depends on what you’re most comfortable investing in.

To help you further make your investment decisions, check out the rest of what our blog has to offer. Once you’re doing the reading, you’ll be an expert in all things hedge funds, ETFs, and investment.

An image representation of the increasing revenue of hedge funds.

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