Hedge funds pool capital from wealthy individuals and institutions and give managers wide freedom over assets and tactics. Unlike many retail mutual funds, they may short sell, use derivatives, and borrow heavily. Fees are often high, and liquidity for investors can be limited by lock ups. Performance varies widely by strategy and manager skill. The name suggests risk reduction, but many hedge funds take substantial risk in pursuit of absolute returns.

Key takeaways

  • Access is usually limited to professional or high net worth investors.
  • Strategies can be long short equity, macro, event driven, or multi strategy.
  • Leverage can magnify both gains and losses.
  • Past returns of famous funds are a poor guide to the average outcome.