A hedge fund is a private investment fund that uses advanced strategies to generate high returns. It pools money from wealthy individuals and institutions. Unlike mutual funds, hedge funds are lightly regulated and can use leverage, short selling, and derivatives. They charge high fees: typically 2 percent of assets plus 20 percent of profits. That fee structure, called "two and twenty," has made some managers extraordinarily rich.

Strategies vary widely. Long-short equity funds buy undervalued stocks and short overvalued ones. Macro funds bet on interest rates, currencies, and commodities. Event-driven funds trade around mergers, bankruptcies, and restructurings. Quantitative funds use algorithms and statistical models. Some funds are highly concentrated. Others hold thousands of positions. The label "hedge fund" covers a broad range of approaches.

Performance has been mixed. Some funds deliver spectacular returns. Others fail. The average hedge fund has underperformed simple index funds over the past decade, after fees. High fees eat into returns. Lock-up periods restrict when investors can withdraw. Despite this, hedge funds remain popular with institutions seeking diversification and with wealthy investors seeking exclusivity. The industry manages trillions of dollars and remains a major force in global markets.

Common strategies

• Long-short equity
• Global macro
• Event-driven
• Quantitative
• Distressed securities