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Difference between Hedge Funds and Pension Funds

A fund is generally an amount of money saved for a specific objective while in business, it can mean the financial resources of an organization or company. The industry has many types of funds and this includes pension funds and hedge funds. We will bring to light the difference between hedge funds and pension funds in this article.

Basic Difference between Hedge Funds and Pension Funds

Hedge funds are investment vehicles. It pools investors’ capital for the purpose of generating returns. Hedge funds have little regulations on terms as opposed to pension funds, and can involve leverage positions and bets.

Pension funds, on the other hand,  are settings or plans created for managing the retirement funds of a particular group. The main objective is retirement income.

A Closer Look on Pension Funds

Pension funds involve retirement money. It is created for the employees or members of a company, state, or social unit. Money is put into the fund over time to save up retirement income. The sum is aggregated from contributions made by employees and employers.

A Defined Benefit Fund is a pension fund that requires a fixed contribution. The amount should net a return on the investment to pay for expected benefits while any deficit due to inflation or other variables are covered by the organization. Thus, this type of fund ensures a fixed income to the beneficiary.

A Defined Contribution relies on the performance of the fund. The better it does reflects on the benefits. 401(k)s are a common example. The risk is transferred to the employee in this type of fund.

A Closer Look on Hedge Funds

Hedge funds usually involve a limited or limited liability partnership. People’s money (investments) are managed by businesses with the goal of receiving returns. Hedge funds can consist of complex portfolios and aggressive strategies. They involve a degree of risk.

Pension fund holders can put their fund money into hedge funds or direct investments. The main difference between hedge funds and pension funds are the higher risk on the former. Careful management and knowledge of such risks is essential in hedge fund investments.

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