In the simplest of terms, the difference is performance.

A hedge fund is usually judged on it's ability to make money. This is called absolute return. A mutual fund is usually judged against some sort of index or ranked against its peers. This is referred to as relative return.

Still curious?

We are all familiar with the way a mutual fund works and the way we should, in theory, go about picking them. We look at a variety of information from their relative return to the tenure of the manager, expenses, investing strategies, etc. When mutual funds invest, their returns can only go up when markets appreciate. In a down market, their return suffers. When looking for a hedge fund, the shopping experience relies almost solely on the manager's ability to give the investor absolute return.

To do that, the manager has the ability to not only go long a stock as mutual funds are mostly required to do, but they can short a stock as well. They can use leverage, options, futures, even involve themselves in securities of questionably stable companies. All to make a return on their investors money. Oddly, this investing style makes them less volatile than mutual funds over the long run and in any market.

Entry fees into this exclusive club where every means possible is used to survive and profit in any market was once quite expensive, starting at $500,000. This price has come down some recently to open the door for investors who have built a sizable nest egg but are still short of getting George Soros interest.

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