Mutual Funds and Hedge Funds are totally different in the way they invest, their aggressiveness, their portfolios etc.
Hedge Funds are not regulated, while Mutual Funds are
Mutual Funds across the globe are regulated whether it is India or the United States. In India, they are regulated by the Securities and Exchange Board of India, while in the US they are regulated by the US Securities and Exchange Commission.
Many say that regulations for Hedge Funds may be on the way, but, when that will happen is difficult to say.
Also Read 5 Reasons to invest in a mutual fund
Restriction on investments
Hedge funds can take exposure to anything and everything. This could be gold or even lottery tickets. This cannot and does not happen in the case of mutual funds. They follow a more disciplined approach when investing, restricting themselves to quality debt and equity.
Hedge Funds can invest for short term while Mutual Funds look at short term
Mutual Funds are generally not swayed by returns in the very short term. For example, they tend to hold onto investments for the very long term. Hedge funds look at more short term returns.
Mutual funds do not invest in derivatives, while Hedge Funds may well do so. This is in line with their ability to take more risks in the short term and profit from those risks.
Read more on Derivatives here
Hedge Funds may invest with borrowed money
Hedge Funds also tend to invest money that is borrowed. Again, it's because of their nature to take risk. And, buying and selling on the basis of this can be really risky. Mutual funds do not borrow money and invest the corpus that is available.
Hedge Funds can short sell
Hedge Funds can short sell, while Mutual Funds do not.
As can be seen there is a lot of difference between a Hedge Fund and a Mutual Fund. Essentially, Hedge Funds take very risky bets in the short term, while Mutual Funds do not take risks in the short term and invest for the long term.
Small investors do not invest in Hedge Funds, but, certainly invest in Mutual Funds. Also, Hedge Fund managers may get paid based on their performance, while Mutual Fund Managers get paid irrespective of performance.