Dear Dagen: The Difference Between Mutual Funds and Hedge Funds

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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

Send your questions and comments to

deardagen@thestreet.com, and please include your full name.

Dear Dagen aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.