Hedge Fund vs. Stock Broker
Original post by Geri Terzo of Demand Media
Hedge fund managers and stock brokers both provide financial services. Nonetheless, the role that of each of these market professionals serves differs significantly. Hedge fund managers are investment advisers who adhere to relatively light regulatory oversight. Stock brokers serve as a liaison between investors and major exchanges. Wealthy individuals and institutions looking for someone else to make investment decisions across various asset classes may invest in hedge funds. Individuals who want to buy and sell particular stocks typically go through a broker for these transactions.
Hedge funds are investment portfolios that contain combined assets from multiple clients. Fund managers make decisions on behalf of investors according to an investment strategy. Stock brokers are certified investment professionals who execute buy and sell orders for individual and institutional investors. Traditional stock brokers provided services at brick-and-mortar locations, but the proliferation of the Internet has driven much of broker activity online. Investors must have a minimum net worth to invest in hedge funds, while in some cases there is no investment minimum to open a stock brokerage account.
Hedge fund managers are some of the most sophisticated traders in the markets. These professionals use complex strategies to capitalize on newly discovered opportunities across various asset classes. For example, hedge funds may trade stocks -- but are also active in the commodity markets where energy and agricultural contracts are traded. Stock brokers are licensed to participate in the equity markets but may support some of the strategies that are common in the hedge fund industry, such as shorting stocks. A broker's role in shorting is to lend investors shares of stock for investments that are expected to decline in value.
Typically, a hedge fund is defined by the strategy it pursues or the asset classes in which it invests, such as stocks, bonds or commodities. There are essentially two types of stock brokers. A full service broker guides an investor through the investment process and offers insight into the financial securities that might affect a desired goal. A discount brokerage facilitates trades as requested by investors without providing any ancillary services.
Hedge fund fees are much higher than what is common in the brokerage industry. Hedge fund managers are paid two layers of fees for managing portfolios and delivering returns that exceed what's available in the traditional markets. The average fee structure includes a charge for fund performance and another fee for portfolio management. Investors pay fees and commissions to full-service brokers and pay as little as $10 per stock trade for a using discount broker, according to a 2011 "Kiplinger" article.
- Brokerage Review: Best Brokerage Firms For Shorting Stocks In 2011
- MarketWatch; SEC Delays Hedge Fund Registration Rule; Ronald D. Orol; June 2011
- "Forbes"; SEC To Raise Threshold For Hedge Fund And Private Equity Fund Investments; Timothy Spagler; May 2011
- Charles Schwab: Details About Account Fees And Minimums At Schwab
About the Author
Geri Terzo is a business writer with over 15 years experience reporting on Wall Street. Her coverage ranges from institutional investing, including hedge funds and investment banking, to family topics and her career experience includes work for Fox Business, CNBC and "IDD Magazine." Terzo is a graduate of Campbell University, where she earned a B.A. in mass communication.