A hedge fund is a pooled investment fund that employs different strategies to earn active returns for its investors. Unlike mutual funds, hedge funds are typically available only to accredited or institutional investors and have fewer regulatory restrictions.
Hedge funds can invest in a wide variety of assets and use strategies such as short selling, leverage, derivatives, and arbitrage. Their goal is to generate positive returns regardless of whether markets are rising or falling.
For example, a hedge fund might simultaneously buy undervalued stocks and short sell overvalued ones to profit from both directions. While hedge funds can offer higher returns, they also charge higher fees (typically 2% management fee plus 20% of profits) and carry greater risk than traditional investments.