Hedge funds represent a unique and sophisticated approach to investment management, designed primarily for high-net-worth individuals and institutional investors seeking higher returns through more aggressive strategies. These funds employ various financial instruments and investment techniques that are often unavailable to retail investors, such as leverage, derivatives, and short selling. The primary goal of a hedge fund is to generate positive absolute returns regardless of the market's performance, aiming to protect investors' capital during downturns while maximizing gains during upturns.

Managers of hedge funds typically charge a combination of management fees (usually 2% of assets under management) and performance fees (typically 20% of profits), which incentivizes them to perform well. However, these high fees come with significant risks, including the potential for substantial losses. Moreover, hedge funds are subject to less regulatory oversight compared to mutual funds, which can lead to increased risk but also greater flexibility in strategy implementation.

Investing in hedge funds requires a thorough understanding of complex financial instruments and market dynamics. Due diligence is crucial when selecting a hedge fund, as it involves evaluating the fund’s strategy, performance history, management team, and risk management practices. Despite the challenges, many investors find hedge funds appealing due to their potential for high returns and the diversification benefits they offer to an investment portfolio.