Dear Dagen: The Difference Between Mutual Funds and Hedge Funds

Plenty of people can tell you the basic difference between a hedge fund and mutual fund.

Hedge funds are private investment pools that apply aggressive investment strategies and leverage. Typically used by wealthy individuals, the investment minimums can start around $1 million.

Mutual funds are public investment companies that typically invest in stocks, bonds and cash. These funds offer small investors the advantages of diversification and professional management for very little money down.

However, the real differences are more pronounced and certainly more interesting.

Hedge funds are virtually unregulated by the Securities and Exchange Commission. Mutual funds are heavily regulated by the SEC.

Hedge funds aren't supposed to publicly market themselves. Mutual funds advertise heavily.

Hedge funds, at best, report their returns quarterly. Mutual funds report their prices daily.

But even these facts don't perfectly explain the cultural divide between the hedge fund and mutual fund worlds.

With hedge funds, you get an intriguing cocktail of monster-size egos, the wealthiest investors in the world, exotic trading strategies and occasionally enough leverage to sink the global financial system.

Of course, your garden-variety hedge fund trades basic securities for customers who are wealthy but not stinking rich. Most have never devalued a currency or received a $3 billion bailout.

Still, the differences between hedge funds and mutual funds can be dramatic.

This quick take should give you a deeper perspective:

	Mutual Fund Manager	Hedge Fund Manager
Standard Annual Charge to Investors	1.5% of assets	1% of assets and 20% of profits
Site of Annual Industry Conference	Washington, D.C.	Bermuda
The Perfect Name for a New Fund	Any Greek god	Any jungle cat
The Perfect Place to Meet a Prospective Investor	Concord, N.H.	Concorde, Row 3
Typical Customer	Works for Ford	Last name is Ford
Possible Top Holding	Microsoft	Swap play on Microsoft linked to ringgit
Role Model	Peter Lynch	George Soros
Original Career Plans	Work as a sell-side analyst on Wall Street	Marry rich
Next Career Move	Start a hedge fund	Start an Internet company
Dream Career Move	Start an Internet company	Produce independent films
Office Decor	Bloomberg machine, conference table, books by Nobel Laureates	Bloomberg machine, conference table, a few Nobel Laureates
Best Pitchman	Himself	College friend with the $200 million inheritance
Marketing Strategy	Appear on CNBC and give great quotes to the Wall Street Journal	Appear on CNBC and give five Chagalls to the Museum of Modern Art
Favorite Model	Capital Asset Pricing Model	Girl in the fall Prada ad campaign
Summer Plans	Visit Malaysia	Devalue Malaysia
Best Excuse for a Bad Year	My style was out of favor	European Central Banks hate me
Biggest Mistake of 1998	Believed Cendant had auditors	Believed Russia had tax collectors
Typical Line from an Investor Letter	"Despite underperforming the S&P 500 this year, we are proud of our results."	"Despite underperforming the S&P 500 this year, we are proud of our results."
Year 2000 Fear	Back office mixes up client account statements	Gucci mixes up client Christmas presents
Worst Enemy	Inflation	A coup d'etat
Underlying Motivation	My clients worked hard for this money.	My clients' 19th-century ancestors worked hard for this money.
Favorite Book	Security Analysis by Graham and Dodd	The Art of War by Sun Tzu
Marriage History	Still married to college sweetheart	Sealed by court order
Weekend Home	House with a pool	House with an island
Retirement Plans	Take family to Europe	Take capitalism to Eastern Europe

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