Why are hedge funds typically targeted at accredited investors?

Hedge funds are typically targeted at accredited investors primarily to ensure that these investors possess the necessary financial knowledge and resources to understand and withstand the risks associated with hedge fund investments. Accredited investors, by definition, are individuals or entities that meet certain income or net worth thresholds, which often indicates a higher level of sophistication in financial matters. This group is expected to have a better understanding of complex investment strategies and the potential for high volatility and illiquidity that come with hedge funds.

By limiting participation to accredited investors, hedge funds can operate with fewer regulatory constraints compared to offerings available to the general public. This requirement serves to protect less experienced investors from investments they might not fully comprehend or be financially prepared to engage in, thereby aligning the fund’s sophisticated strategies with an investor base that is more likely to engage with such products responsibly.