Difference Between Hedge Funds and Mutual Funds
12 August 2025 · Sachin Gadekar
A complete guide to hedge funds vs mutual funds: differences, returns, and which is right for your investment goals.
Introduction
When it comes to investment options, two names often stand out — hedge funds and mutual funds. While both pool money from investors and invest in diversified assets, they operate under vastly different structures, regulations, and risk profiles.
At Ultra, where we offer multiple investment opportunities, we believe understanding these differences is crucial for investors who want to optimize their portfolios. In this guide, we’ll compare hedge funds vs mutual funds in detail, including returns, regulations in India, and how they differ from private equity.
Hedge Funds
Hedge funds are privately managed investment funds that employ advanced strategies such as leverage, derivatives, and short selling to generate high returns. They are typically open only to accredited or high-net-worth investors due to their higher risk profile.
Mutual Funds
Mutual funds are publicly offered investment schemes regulated by SEBI in India. They pool money from a large number of retail and institutional investors and invest in equities, bonds, and other securities, offering relatively moderate risk.
Difference Between Hedge Funds and Mutual Funds in Tabular Form
| Criteria | Hedge Funds | Mutual Funds |
|---|---|---|
| Regulation in India | Lightly regulated, often structured as private trusts | Strictly regulated by SEBI |
| Investor Eligibility | Accredited / High-net-worth individuals | Open to retail and institutional investors |
| Investment Strategies | Leverage, derivatives, short selling, arbitrage | Long-term equity, debt, hybrid strategies |
| Risk Level | High risk, high return potential | Moderate to low risk |
| Liquidity | Often have lock-in periods | Highly liquid (can be redeemed daily or weekly) |
| Minimum Investment | Very high (often ₹1 crore or more) | Low (can start with ₹500 in SIPs) |
| Fee Structure | “2 and 20” model – 2% management fee + 20% performance fee | Expense ratio (typically <2%) |
| Returns | Can be very high but volatile | Relatively stable, market-linked |
Hedge Funds vs Mutual Funds Returns
Historically, hedge funds aim for absolute returns — meaning they try to generate profits regardless of whether the market is going up or down. This is achieved through aggressive and sometimes unconventional strategies.
Mutual funds, in contrast, aim for relative returns — they typically seek to outperform a benchmark index over time. While mutual funds may not deliver the extreme highs of hedge funds, they also protect investors from extreme lows.
Hedge Funds vs Mutual Funds vs Private Equity
It’s common for investors to confuse hedge funds with private equity. Here’s how all three differ:
Hedge Funds – Trade liquid assets, focus on short-term to medium-term returns, high-risk strategies.
Mutual Funds – Invest in diversified assets for long-term returns, retail-friendly, SEBI regulated.
Private Equity – Invests directly in private companies or takes companies private, with a long-term (5–10 years) horizon.
Hedge Funds in India
While hedge funds are common in global markets, India’s hedge fund industry is relatively small due to regulatory restrictions and high entry barriers. SEBI classifies them under Category III Alternative Investment Funds (AIFs).
Some well-known hedge-fund-like structures in India operate as PMS (Portfolio Management Services) or Category III AIFs. These require significant minimum investments, making them inaccessible to retail investors.
Which is Right for You?
Choosing between hedge funds vs mutual funds depends on:
Risk Appetite – Hedge funds for high-risk takers, mutual funds for moderate investors.
Investment Horizon – Mutual funds for long-term wealth creation; hedge funds for potentially faster but riskier gains.
Capital Availability – Hedge funds require large investments; mutual funds allow starting small.
For most retail investors in India, mutual funds remain the more practical choice. However, Ultra provides access to a range of investment products so that sophisticated investors can also explore alternative strategies.
Key Takeaways
Mutual funds are accessible, regulated, and ideal for long-term growth.
Hedge funds are exclusive, high-risk, and require deep market expertise.
Both have roles in a well-diversified portfolio — depending on investor goals and risk profiles.
FAQs on Hedge Funds vs Mutual Funds
Q1. What is the main difference between hedge funds and mutual funds?
Hedge funds use aggressive strategies and are open only to accredited investors, while mutual funds are regulated, retail-friendly investment vehicles.
Q2. Are hedge funds allowed in India?
Yes, but only under SEBI’s Category III AIF regulations, and they are accessible only to high-net-worth individuals.
Q3. Which gives better returns — hedge funds or mutual funds?
Hedge funds can deliver higher returns but with significantly higher risks, while mutual funds aim for stable, market-linked returns.
Q4. What is the difference between hedge funds, mutual funds, and private equity?
Hedge funds focus on short-term gains from liquid assets, mutual funds focus on diversified long-term growth, and private equity invests in private companies for the long term.
Q5. Can I invest in hedge funds through Ultra?
Ultra offers multiple investment opportunities and can connect sophisticated investors with alternative investment products, subject to eligibility.