Hedge funds typically have what characteristic that differentiates them from mutual funds?

Hedge funds are distinguished from mutual funds primarily by their more flexible investment strategies. This flexibility allows hedge funds to pursue a wider range of investment opportunities, such as employing short selling, using leverage, and engaging in derivatives trading. Unlike mutual funds, which are typically bound by strict regulations that limit their investment choices and strategies to protect retail investors, hedge funds can adapt their strategies based on market conditions or investor preferences.

This characteristic enables hedge funds to seek higher returns, albeit usually with increased risk. They often aim to deliver absolute returns, regardless of market conditions, which can involve unconventional investment methods. By contrasting with mutual funds, which focus on diversification and risk mitigation within set parameters, hedge funds appeal to investors who appreciate the potential for higher returns and are comfortable with higher risks and less transparency.