Hedge funds are alternative investments using pooled funds that employ various strategies for their investors to earn active returns, or alpha. In both domestic and international markets, hedge funds can be aggressively managed or make use of derivatives and leverage in order to generate high returns (either in an absolute sense or above a specified market benchmark).

It should be noted that, in general, hedge funds are only available to accredited investors because they require fewer SEC regulations than other funds. The fact that hedge funds face less regulation than mutual funds and other investment vehicles is one aspect that has set the hedge fund industry apart.

Each hedge fund is built to take advantage of certain market opportunities that are identifiable. Hedge funds use various investment strategies and are thus often classified according to the style of investment. In risk attributes and investments between styles, there is substantial diversity.

Legally, private investment limited partnerships that are open to a limited number of accredited investors and require a large initial minimum investment are most often set up as hedge funds. Hedge fund investments are illiquid because they often require investors to keep their money for at least one year in the fund, a period known as the lock-up period. Withdrawals may also occur only at certain times, such as on a quarterly or bi-annual basis.