Hedge funds are often exclusively open to a limited range of people, including professionals and wealthy investors. This means that the funds are exempt from regulations governing short selling, leverage and other hedge methods.

This, along with the performance fee and the funds open-ended structure makes the hedge fund far different from an ordinary investment fund.

Hedge funds are very similar to mutual funds, the main difference between the two being the strategies they use. Hedge funds use strategies other then investing in bonds etc and can therefore generate positive returns without being effected by the rise and fall in the equity and bond markets.

A way in which you can invest in hedge funds is to put your money into a company just before a major merger; shares will go up significantly once the merger occurs. This way of investing is called risk arbitrage.

This is a very high risk investment strategy as many mergers don’t happen at all, for that reason it is important to know a lot about the merger before you invest a large amount of money in a company. The most commonly used method is short selling. This is where you invest in undervalued securities, trading commodities and contracts. This takes advantage of the difference between the current market price and the highest possible purchase price in events such as mergers.

Hedge funds are a very helpful tool for diversifying investment portfolios. It reduces the risk and volatility of a portfolio and is not related to the broad stock market changes. It is therefore a smart way to invest for those who are willing to take the risk.