Question

Please Compare and contrast closed-end funds, open-end funds, and hedge funds.

Answer 1

Closed-end Funds are which that raises or pools money from the investors in the form that is similar to an IPO, where investors can only invest in this close-end fund during the Window period that is opened during the initial offering of the units, just as similar to the mutual fund, this window period varies from different markets among countries due to their regulations. So an investor can only invest in a close-end fund during the time when the window is open for the particular close end fund, and close-end funds trade just like a any other stock on the exchange, for which the price changes dynamically all through the day just like a stock. Investing in a close-end fund is possible through a stock broker account like for example Zerodha, Sharekhan in India. Close-end shares are more liquid as they trade on the exchange.

Open-end Funds are which that raises or pools money from the investors and provide them an opportunity to invest in a diverse portfolio of different sectors etc, Open-end fund is where investor can enter any time by purchasing the units at a price called NAV (Net asset value) which calculated at the end of the day basing on the assets that the fund holds, which in return depends on the Buy and Sell transactions of the units as the fund manager needs to buy or sell the assets in order to manage the portfolio of money pooled by the investors with respect to their buying and selling of units, Open-end fund units can be bought directly from the market through a Stock broker like as i explained above or the AMC (Asset management company) sells it directly through its distributors which again incurs commission, these days majority of the open-end units are bought directly through the stock broking account to avoid commission that needs to be paid to the distributor which are ultimately levied on the investor.

Hedge funds are the most less regulated among all the funds that an investors has in the market, Hedge funds are basically the same process where the fund house pools up the money but in the above types of funds the money is invested in the Equity and Debt securities but where as coming to the hedge funds the money is invested in the market using derivatives and complex strategies by the Hedge fund managers in order to achieve high amount of returns as the risk is high following the derivatives and complex hedging strategies in turn the return is very high so as the risk, Hedge funds invest in all types of derivatives available in the market and the they even invest on the OTC market as it is not regulated fund. Hedge funds allow only accredited investors or high net worth individuals to invest in the fund, Complex strategies used in hedge funds make them highly risky funds and also the use of leveraged capital may make nominal loss into a significant loss.

As its a comparative approach of question i am unable to cover completely the depth of each of the three concepts in detail but i just tried my best to highlight the differences in comparing the all three funds.

Please come up with your queries, thank you.