What is a defining characteristic of hedge funds?

A defining characteristic of hedge funds is their use of high-risk methods to seek large capital gains. Hedge funds are known for employing various investment strategies that can include extensive use of leverage, short selling, and derivatives trading. These strategies are aimed at achieving significant returns, which often requires taking on more risk compared to traditional investment funds. Unlike mutual funds that generally stick to safer investments, hedge funds actively pursue opportunities that might provide higher rewards, albeit with increased volatility and potential for loss.

This emphasis on high-risk approaches distinguishes hedge funds from other investment vehicles, making them suitable primarily for accredited or institutional investors who can handle the potential for greater losses associated with such aggressive strategies. The focus on high returns through riskier investments is central to the hedge fund industry, setting them apart from other types of funds, which might prioritize stability and lower risk.