4 Reasons Hedge Funds Outperform Mutual Funds

Investing in hedge funds has become a popular alternative to mutual funds. While hedge funds utilize the same diversified investment strategy, they work a little bit differently and typically outperform mutual funds. Here are a few reasons that hedge funds usually outperform mutual funds.

1. Different Investments

Many hedge funds do not make a habit of investing in the same types of investments at mutual funds do. While mutual funds focus mainly on stocks, bonds, and other traditional forms of investment, hedge funds do not. They get outside of the normal spectrum investment and focus on other things. Their fund managers are typically experts in a number of different investment types. For example, you might choose to get involved in a hedge fund that invests solely in Forex. The Forex market has huge potential for investors and is actually the largest financial market in the world. Therefore, if you have a fund manager that knows what they're doing, they can bring in a substantial return for the investors.

You might find hedge funds that invest in commodities, futures, real estate, website domains and any number of other investments outside of the stock market. This gives investors much more opportunity to choose investments they are comfortable with and can make a high return.

2. Uncorrelated Investments

With such a wide array of investments available for hedge funds, it is possible to choose investments that are not correlated to the traditional financial markets. Therefore, when the regular stock market is down and traditional investors are suffering, hedge fund investors could still be making a nice return on their investment. For example, if you buy into a hedge fund that invests in gold, it will not move according to the stock market. Gold does not tend to be correlated to any other market, and therefore the investors of this hedge fund can still grow their accounts even during a recession. Many mutual funds, on the other hand, invest in securities that are all correlated to one other. This means that the entire mutual fund portfolio could suffer as a result.

3. Leverage

Another reason that hedge funds tend to outperform mutual funds is because of the leverage involved. Many mutual funds do not use leverage because of the low risk nature of their investment strategy. Hedge funds, on the other hand, will regularly employ leverage to magnify the gains for their clients. Although sometimes this works against the hedge fund, it can often provide a higher return for hedge fund investors as a result.

4. Strategy

The strategy that both funds employ are usually vastly different. Most mutual funds try to compare their results to a certain benchmark. Therefore, their main objective is to beat this benchmark or not go very far below it. Hedge funds try to reach a certain investment goal. They do not use benchmarks and therefore typically manage their portfolios much more aggressively. This results in a greater return for the investors.

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