What is a typical characteristic of hedge funds compared to mutual funds?

Hedge funds typically require an initial investment from accredited investors, which distinguishes them from mutual funds that are generally accessible to a broader range of investors, including retail investors. This characteristic stems from the regulatory framework surrounding hedge funds, which allows them to limit their investor base to those with a certain level of income or net worth, thereby permitting them to pursue more complex investment strategies that may not be suitable for the average investor.

The requirement for accredited investors helps hedge funds in leveraging sophisticated trading techniques and strategies that might not align with the investment profiles or risk tolerances of retail investors. Hedge funds may engage in practices such as short-selling, derivatives trading, and using leverage, which can entail higher risk and potential for higher returns, but also greater volatility. This exclusivity also contributes to the perception of hedge funds as a more elite investment vehicle, theoretically providing potential investors with unique opportunities that are not available in mutual funds.

Moreover, while regulatory scrutiny for hedge funds is present, it is less stringent compared to that for mutual funds, allowing for greater flexibility in investment choices. This flexibility is also why hedge funds can charge higher fees for their management services, often a point of differentiation when compared to mutual funds. Consequently, recognizing the nature of hedge funds in requiring accredited investors