What Is The Difference Between A Trust Fund And A Hedge Fund?
Have questions about trust funds and hedge funds? Read this article to answer your questions. Including differences between the two.
There is some confusion among new fund managers when it comes to two types of investment vehicles: a trust fund and a hedge fund. Technically, a hedge fund could be created and run by trust laws. Conversely, a trust fund could be run with an investment strategy similar to that of a hedge fund.
While these are rare situations, they are circumstances that cause fund managers to look closer at these investment tools. To help distinguish between the two, here is the difference between a trust fund and a hedge fund.
The concept of trusts and their respective funds dates back to the Roman Empire. Back then, the practice expanded property rights and protected the assets from possession by the government. Though initially oral agreements known as fideicommissa, eventually became part of the Roman legal system.
Today, a trust fund is a component of estate planning. It provides legal precedence to retain assets for a person or a business. A trust fund can hold money, real estate, stocks & bonds, or a company. In many cases, it retains a combination of these interests.
This type of fund is handled by an individual or a firm called a trustee. This entity is responsible for making decisions in the interest of the trust’s beneficiary. However, they aren’t the fund manager. The trustee hires this person or firm to work the investments to receive a maximum return.
In this example, your business could be placed in a trust. It is then released at the point of death or when those receiving its assets reach a certain age. Until then, your fund manager handles the trust’s composition to obtain a maximum return on investment.
Hedge funds are a much newer concept. The first one, called a Hedged Fund, was created in 1949 by Alfred Winslow (A.W.) Jones. It focused on a long/short investment approach with an emphasis on stock selection over immediate returns.
Today, a hedge fund represents a financial partnership between an investment manager and their customers. They utilized a group of pooled funds managed two ways. First, it’s done aggressively for a maximum return. Second, the fund manager makes use of derivatives in certain commodities to create higher returns.
The concept of pooled investments and fund managers is where the similarities stop between a trust fund and a hedge fund. Overall, they go different routes to achieve what’s needed for their clients.
In essence, trusts come in several forms while hedge funds can link to different investments across the globe.
Among the most common trust types are:
Also known as a revocable trust, it lets the grantor control the fund’s assets during their lifetime. This form avoids probate, so its assets are distributed quicker to its beneficiaries.
This form has tax benefits because it’s difficult to either change or revoke what’s contained within. It also avoids probate for faster delivery of its assets to the respective beneficiaries.
This is created to benefit a certain charity or the general public. It includes a Charitable Remainder Annuity Trust (CRAT) that pays out an annual fixed amount to the beneficiaries during their lifetime.
Conversely, hedge funds rely on strategies instead of categories. These financial blueprints are based on both risk and maximum profit. These strategies include:
The original concept by A.W. Jones is still utilized today. It’s a combination of long and short-term investments that are researched to determine the expected winners and losers. The success of the long game counteracts any losses from the quick turnaround. Through this method, market risk is reduced.
Where long/short funds normally have a net long market exposure, the market-neutral version targets zero net exposure. In other words, the shorts and longs have an equal value. Risk is reduced in this manner as fund managers generate the hedge’s return from stock selection. However, the expected returns are lower.
This hedge fund is most commonly known to the public. Here, fund managers purchase the debt of companies in financial distress such as bankruptcy. Then, they bet on the short equity of the organization’s recovery. Investors in event-driven funds have to be patient and willing to take on some risk. It may take time for the company to fail. Conversely, the financial market or other circumstances could change the company’s outlook for the better.
As there are many types of hedge funds, managers tend to consolidate their operations with an application like MetaTrader 5 for hedge funds. This all-in-one software platform helps them establish a fund and convert it to an automated process within five minutes. Try to select management applications approved by the HFM Connect hedge fund community.
Hedge fund investors must be accredited. This is an individual or organization that meets several qualifications defined by the Securities and Exchange Commission (SEC). Generally, these are high-net-worth investors, banks, or brokers that don’t need to file regulatory disclosures for added protection.
Conversely, trust investors don’t need accreditation. In many cases, the receivers of the trust’s assets are family members, businesses, or charities. At the same time, the people who put money and other investments into the trust are individuals or company owners themselves.
Overall, the difference between a trust fund and a hedge fund comes down to stability. The assets placed in the former have less risk of total collapse. With the latter, investors make several bets on the outcome of both sort and long-term equity challenges. Furthermore, where hedge funds look at near-future returns, a trust fund is a long-term investment for the future.