If you are building an investment portfolio in Singapore, hedge funds, mutual funds and Exchange-Traded Funds (ETFs) are probably some of the most common options you would have come across.
Even though these investment products share similar traits, there are also differences that may or may not resonate with your investment goals.
Want to know more? Read on because this article will reveal all that you need to know about investing in hedge funds, mutual funds, and ETFs.
Differences between investing in hedge funds, mutual funds and ETFs
These three investment options are commonly used by Singapore investors for portfolio diversification. Here’s a quick glance before we take a closer look at each of them.
| Hedge funds | Mutual funds | ETFs | |
|---|---|---|---|
| Buy/Sell | Hedge fund companies/ managers | Brokerage firms or Mutual fund companies/ managers | On an exchange |
| Risk | High risk | Low risk | Low risk |
| Liquidity | Low. Usually come with a lock-in period | Moderate but less than ETFs. Trade only once a day | High. Can buy/sell any time |
| Availability | Institutional investors and high-net-worth individuals | General public | General public |
| Level of Transparency | Little to no transparency. Hedge funds do not disclose their portfolios to public | Quite transparent. Holdings are reported periodically | Very transparent. Most ETFs disclose their full portfolios on public websites |
About hedge funds
Hedge funds are managed pooled investment funds that employ complex and aggressive strategies to deliver above-market returns for investors.
To do this, a hedge fund manager will take both short and long positions, buy and sell equities, initiate arbitrage and trade bonds, currencies, convertible securities, commodities and derivative products to generate maximum returns at reduced risk.
While investing in hedge funds promises highly lucrative potential, they are also riskier, less liquid and less regulated than mutual funds and ETFs in Singapore.
This is also the reason why they are restricted to accredited and institutional investors who can afford larger initial minimum investments and have the expertise to manage the risks associated with such investments.
About mutual funds
Like hedge funds, mutual funds are private investment options built from pooled funds from investors. The funds are managed by fund managers on behalf of the investors and they have total autonomy to decide which stocks or bonds to include in the holdings.
The upside of investing in mutual funds lies in wider exposure to shares at a lower price than direct investment. It is good for those who are unsure about where to invest and prefer to rely on the expertise of fund managers.
Investors can also expect much lower investment risk since most mutual funds will invest anywhere from 50 to 200 different securities to diversify the portfolio.
The typical disadvantages associated with mutual funds are the high fees, tax inefficiency, potential for management abuses and unavailability of intraday trading. Unlike ETFs which can be traded throughout the day, mutual funds can only be traded once per day after the market closes.
While this is not a huge problem for passive investors, it could mean there is a different order price than you expect if you place orders manually.
About ETFs
This is a form of portfolio investment in Singapore that is built out of a series of underlying assets or indices. An ETF will comprise a collection of publicly available products like stocks, bonds and commodities.
One good example is the Straits Times Index (STI) ETF which mirrors the performance of top 30 companies listed on the Singapore Exchange. The portfolio’s returns will be based on the collected gains and losses in those underlying assets.
Investing in ETFs may not be as lucrative as buying an individual stock but it is a lower-risk product that may strike a chord with more risk-averse investors. It is widely used for portfolio diversification in Singapore.
Also, unlike mutual funds and hedge funds, which are strictly managed by fund managers, ETFs can be freely traded on exchanges like regular stocks. The high transparency and liquidity also made it a popular choice amongst retail investors.
Which should you invest in?
When deciding which is a better investment option for you, you must first assess your investment goals, risk appetite, funds available and how much control you want over your investment portfolio in Singapore.
If you are a seasoned investor with a healthy net worth and do not mind dabbling with lucrative but risky investments, working with a hedge fund manager may offer generous returns.
Some top hedge funds of 2023…
Read More: Hedge funds vs mutual funds vs ETFs: Which should I invest in?, Money News