Hedge funds and mutual funds are both pooled investment vehicles that invest primarily in securities and commodities. However, mutual funds are subject to far more government regulation than hedge funds. Mutual funds are registered as investment companies under the Investment Company Act of 1940. As such, they are subject to certain limitations on their ability to short sell, use leverage, and charge management fees.
Hedge funds, on the other hand, are known for their free use of leverage and short sale strategies as well as performance based management fees. Mutual funds also must provide investors with daily liquidity, meaning that investors can buy or sell shares at the end of each trading day. Conversely, hedge funds often have lock-up periods of several years where investors cannot leave the fund.
Mutual funds generally have much lower minimum investments, as well, and therefore are available to many small investors. Hedge funds, of course, often have very high minimum investments and are only available to very wealthy individual investors and institutions.