Basically a hedge fund is similar to a mutual fund in that it takes in money from investors and invests it giving them profits. The difference is that hedge funds are usually setup offshore and therefore they do not need to abide by all the regulations of mutual funds. This frees them to utilize any and all instruments to trade, including stocks, bonds, futures, commodities, and forex. They can also short stock, so they can make money when markets fall, mutual funds cannot. They typically charge more than mutual funds, on the order of 2% of assets under management and 20% of the profits they create for their clients. They can only take on wealthy investors and are prohibited from directly marketing to the public. A few hedge funds, like Rennaissance, Citadel, SAC, and GLG have created great fame for the industry by generating outsized returns for many years on end regardless of what the market does. However, as an industry a lot of recent studies have pointed out that they have not outperformed the markets.

A hedge fund is an investment vehicle – a private investment fund, with restricted number of investors.

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