This differs from hedge funds because the majority of a hedge fund manager's compensation comes from performance fees. A further consideration is that there is a point where returns diminish versus total capital. This, coupled with the fact that a smaller fund is more nimble, contributes to the smaller size of hedge funds relative to mutual funds. Mutual funds are owned and operated by investment companies. Capital for the mutual fund is raised from unitholders so that very little of the investment company's own money is actually invested.
Investors share equally in gains and losses proportionate to their investment after fees.
This is similar to hedge funds where profits or losses are allocated to the partners based on their percentage ownership after fees. It is also very common for the incentive fee to be hurdle based. The incentive fee determination will vary from hedge fund to hedge fund and is dictated by the partnership agreement. Both mutual funds and hedge funds offer investors professional management and instant diversification. Advantages of Hedge Funds TOP Hedge fund managers are more flexible in their ability to make investment decisions relative to traditional money managers for the simple reason that hedging strategies like short selling, the use of leverage and the use of most derivative securities are generally beyond the reach of the traditional fund manager.