What is a hedge fund?

A hedge fund is defined as an investment fund that employs a variety of strategies to earn active returns for its investors. This means that hedge funds utilize diverse approaches, including but not limited to long and short positions, leverage, derivatives, and arbitrage opportunities. They are designed to achieve high returns, sometimes regardless of market conditions, which differentiates them from more traditional investment vehicles.

Hedge funds often target affluent and institutional investors, allowing them more flexibility and fewer regulatory constraints compared to mutual funds. This flexibility enables hedge fund managers to implement specialized investment strategies tailored to market opportunities or specific investment philosophies, contributing to the potential for more aggressive investment tactics.

In contrast, the other responses do not accurately represent the nature of hedge funds or overlook crucial aspects of their operations. For example, categorizing a hedge fund as a type of mutual fund limits its diverse investment strategies, while stating it solely invests in government bonds or is not managed by professionals misses the complexity and active management that characterize hedge funds.