What defines a hedge fund?

A hedge fund is best defined as a limited partnership of investors that engages in high-risk investment strategies with the goal of achieving substantial capital gains. This structure allows hedge funds to employ a variety of tactics that are not available to traditional mutual funds, including short selling, leverage, and derivative trading. The aim of these strategies is to generate high returns, often regardless of market conditions, and they are structured to accommodate sophisticated investors who can afford the risks involved.

Hedge funds typically require a higher minimum investment and can have a more flexible approach to asset allocation and investment strategies compared to traditional investment vehicles. This differentiates them from mutual funds, which usually focus on more conservative investment practices and are regulated in ways that hedge funds are not. The other options do not accurately capture the essence of hedge funds, as they focus on more straightforward investment vehicles or guarantees that do not reflect the high-risk, high-reward characteristic inherent in hedge fund operations.