Final answer:
Hedge funds are investment funds that are open to accredited investors and engage in more aggressive investment strategies with fewer regulations. Mutual funds, on the other hand, are open to the average investor and focus on diversification and professional management. Hedge funds offer potential for higher returns but also carry higher risks.
Step-by-step explanation:
Hedge funds are investment funds that are typically open only to accredited investors due to their complex investment strategies and higher risk levels. Unlike mutual funds, hedge funds are subject to fewer regulations, allowing them to pursue more aggressive and speculative investment strategies. This includes making riskier investments such as short-selling stocks, leveraging, and investing in alternative assets like derivatives and distressed securities.
One key difference between hedge funds and mutual funds is the target audience. Mutual funds are open to the average investor and aim to provide diversified investment options, often managed by professional portfolio managers. These funds are subject to greater regulatory oversight to protect the interests of retail investors.
\Overall, while hedge funds carry higher risks compared to mutual funds, they also have the potential for higher returns. However, it's important for investors to carefully consider their risk tolerance, financial goals, and investment horizon before deciding to invest in hedge funds.