Hedge Fund Vs. Stockbroker
A hedge fund manager combines the assets of multiple investors and makes trading decisions on behalf of those investors. Stockbrokers are the link between individual investors and major stock exchanges and perform buy and sell transactions on behalf of investors. Each requires a different set of skills, as hedge fund investing may involve trading non-traditional contracts on stocks, bonds and commodities, while a stockbroker is mostly active in traditional financial securities.
Hedge funds are compensated with two types of fees. They typically charge an average management fee of 1.5 percent of the assets invested with a fund. A performance fee could be as high as 20 percent of the assets, but a fund manager doesn't normally earn this fee if investors' profits decline. A stockbroker may charge clients a set percentage of the assets in an account or he may earn commissions based on every trade he makes. Additionally, a broker may be paid more for directing clients into investment products designed by the brokerage firm, according to MSN Money.
Hedge funds are expected to perform better than the average investment. Fund managers are experienced in using different strategies that capitalize on opportunities presented through changing market conditions. For instance, a hedge fund manager can make money by betting that investments will decline in value. Stockbrokers usually take long positions in stocks, which means they look for opportunities to invest when stock prices are low, and then sell and make money when those market values increase.
While both hedge funds and stockbrokers can cater to the individual investor, each group has different parameters for accepting clients. Hedge fund investors must have a minimum of $1 million dollars to begin investing in some of the largest and most successful funds, according to Market Watch. Stockbrokers may have account minimums, but those standards can be as low as $1,000 dollars. Some stockbrokers waive the minimum investment requirement for investors who also have a checking or savings account with the brokerage firm.
While hedge funds are more heavily regulated than they were prior to the financial crises of 2008 and 2009, there is still less oversight for hedge funds than there is for stockbrokers. As a result of financial regulation passed in 2010 known as the Dodd Frank law, certain hedge funds must register with the U.S. Securities and Exchange Commission and disclose information about the firm's strategies. Stockbrokers are regulated by both the SEC and the Financial Industrial Regulatory Authority.
Geri Terzo is a business writer with more than 15 years of experience on Wall Street. Throughout her career, she has contributed to the two major cable business networks in segment production and chief-booking capacities and has reported for several major trade publications including "IDD Magazine," "Infrastructure Investor" and MandateWire of the "Financial Times." She works as a journalist who has contributed to The Motley Fool and InvestorPlace. Terzo is a graduate of Campbell University, where she earned a Bachelor of Arts in mass communication.