Difference between Hedge Funds and ETF

The significance of investing cannot be overstated. Everyone invests for a variety of reasons, but the most common ones are to build wealth, ensure one's financial stability in the future, supplement one's income, prepare for retirement, and diversify one's portfolio.

Real estate, bonds, hedge funds, shares, and exchange−traded funds are just a handful of the many available investment options. Some of these terms may be new to you, but it's crucial that you have a firm grip on each investment strategy and know which one has the best potential for you. This article will contrast hedge funds to ETFs, or exchange−traded funds. Hopefully, this sheds light on which of the two alternatives is the better financial fit for you.

What are Hedge Funds?

These private investment portfolios generate profits via the use of various risk investing and risk management strategies. It caters to a select few, with high−net−worth investors being its biggest fans. Investors seeking more liquid investments should avoid hedge funds since they may need their money to be held for a period of up to a year.

Due to the fact that their major goal is to make a profit from particular chances in the market, hedge funds are permitted to utilize several investment strategies, such as leverage, options, and even short−selling. Only high−net−worth individuals can take part. Hedge funds are only accessible to the affluent due to the high minimum investment amount necessary to begin investing.

Here is a list of some of the important characteristics of hedge funds −

  • This is because authorized investors have proven their ability to handle the risks connected with participating in hedge funds.

  • Hedge funds are able to diversify their portfolios by investing in a wide range of asset classes, such as equities, real estate, land, derivatives, currencies, and more.

  • Borrowed money can be used by hedge funds in line with the fund's strategy to increase profits quickly.

  • There is no record of them in the database.

  • They function as joint−stock companies funded by individual investors.

  • They can pick and select from a number of different investment and advertising strategies.

In spite of the high profits, hedge funds are subject to a number of dangers, including the following −

  • They hold investments for extended stretches of time.

  • Investment losses caused by leverage might be substantial under the right conditions.

  • Losses might be rather significant if they occur.

Investors in a hedge fund are entitled to their agreed−upon share of profits, as determined by the firm's compensation structure. Twenty percent of any profits realized and two percent of the fund's total assets handled each year are typically paid to the fund manager under the normal agreement. It's possible that hedge fund investors may be shielded from paying exorbitant fees. This helps portfolio managers avoid taking advantage of the same opportunities twice. Hedge fund managers can be dissuaded from taking unnecessary risks by imposing fee caps.

What is ETF?

This is a financial instrument that is tied to a certain index, bond, commodity, or group of assets. Commonly abbreviated as "ETF" (short for exchange−traded fund). This sort of fund, which is an investment that is listed and traded on a securities market, tracks the returns of the financial instrument that it is designed to follow.

Exchange−traded funds (ETFs) are pools of capital that invest in market assets that make up a portion of a preset index, such as the S&P 500. The value of exchange−traded funds (ETFs) might fluctuate at any point during the trading day. Investors seeking a more liquid and low−cost investment option would do well to consider this option. Because EFTs may hold either a single asset or a basket of assets, they are a versatile and attractive diversification option.

Some examples of ETFs are as follows −

  • These are grouped according to certain industries, such as finance, oil and gas, and finance.

  • Speculate on the currencies of other countries.

  • Corporate bonds, state bonds, federal bonds, and municipal bonds are all included.

  • Uses short selling to make money in the stock market.

  • Consider gold and crude oil as examples of traded commodities.

Those who opt to invest in exchange−traded funds (ETFs) reap the following benefits −

  • Being able to invest in stocks from a wide variety of sectors

  • A small number of broker commissions and other modest operational expenses.

  • You can narrow your target market if you like.

  • The risk of your assets can be reduced by spreading them out.

ETFs do not come without drawbacks, however, such as the following −

  • One's capacity to spread risk across several markets might be hampered if he or she solely buys industry−specific exchange−traded funds.

  • If there isn't enough cash on hand, transactions may stall.

  • Investors should be aware of the potential for high costs associated with actively managed ETFs.

Differences: Hedge Funds and ETF

The following table compares and contrasts the different features of Hedge Funds and ETFs −

Characteristics Hedge Funds ETF
Definition Hedge funds are a special kind of private investment portfolio that uses multiple strategies for investing and managing risk in order to generate financial gains. Exchange−traded funds (ETFs) are a type of financial instrument that seek to mimic the performance of an underlying index, bond, commodity, or portfolio.
Return Hedge funds can provide a guaranteed rate of return. For exchange−traded funds, ROI is contextual.
Management style Hedged funds employ active management strategies. Exchange−traded funds (ETFs) are managed automatically.
Applicable fees For managing a hedge fund, the manager is typically paid an annual management fee equal to two percent of the fund's assets plus twenty percent of any profits made in that year. Hedge funds incur a variety of costs, including operational expenses, trading commissions, and ask/bid spreads.
Type of investors Hedge funds often attracts wealthy people and other qualified investors. Typically, retail investors are the ones who put money into ETFs.
Liquidity There is a lack of liquidity among hedge funds. The market for ETFs is bustling.


Hedge funds are a special kind of private investment portfolio that uses multiple strategies for investing and managing risk in order to generate financial gains. However, exchange−traded funds (ETFs) are financial tools that seek to mimic the performance of a certain index, bond, commodity, or portfolio of assets.

Fees for exchange−traded funds include things like operational costs, trading charges, and ask/bid spreads, whereas the fund manager of a hedge fund typically gets 20% of any gains produced and 2% of the fund's assets every year, regardless of the performance of the fund. To put it in perspective, consider the yearly fees charged by most hedge firms. Investors shouldn't rush to make a decision between the two investment possibilities available to them because both will likely prove to be profitable in the long term.