What characterizes a hedge fund?

A hedge fund is characterized by its goal of seeking high returns through a variety of aggressive and diverse investment strategies. These strategies can include leveraging, short selling, derivatives, and a wide range of asset classes such as equities, fixed income, currencies, and commodities. Hedge funds typically pursue absolute returns regardless of market conditions, which contrasts with more traditional investment vehicles that may focus on matching or beating a market index.

The focus on high returns is a hallmark of hedge funds, as they often employ sophisticated financial techniques to maximize profits while managing risk. This quest for superior performance distinguishes hedge funds from more conservative investment funds that may prioritize capital preservation or income generation.

In contrast, options that suggest hedge funds are open to all types of investors, primarily invest in government bonds, or function as non-profit organizations do not accurately capture the essential characteristics of hedge funds. Hedge funds generally cater to accredited or institutional investors, may have a more varied asset allocation beyond government bonds, and operate for profit rather than as non-profit entities.