Hedge Fund Investing: A Practical Approach to Understanding Investor Motivation, Manager Profits, and Fund Performance

Hedge Funds versus Mutual Funds

A mutual fund is a highly regulated, collective investment vehicle managed by a professional investment manager. It aggregates smaller investors into larger pools that create economies of scale and efficiency related to research, commissions, and diversification. Mutual funds have been available to investors in a wide range of asset classes since the mid-1970s and became increasingly popular in the 1980s and 1990s as a result of retail attention, product deregulation, and solid returns. Mutual funds generally cannot use leverage or short selling and generally cannot use most derivatives.

Collective investment products originated in the Netherlands in the eighteenth century, became popular in England and France, and first appeared in the United States in the 1890s. The creation of the Massachusetts Investors’ Trust in Boston heralded the arrival of the modern mutual fund in 1924. The fund went public in 1928, eventually spawning the mutual fund firm known today as MFS Investment Management. State Street Investors started its mutual fund product line in 1924 under the stewardship of Richard Paine, Richard Saltonstall, and Paul Cabot. In 1928, Scudder, Stevens, and Clark launched the first no-load fund.

The creation of the Securities and Exchange Commission and the passage of the Securities Act of 1933 and 1934 provided safeguards to protect investors in mutual funds. Mutual funds were required to register with the SEC and provide disclosure in the ...