Like other types of investment funds (e.g., mutual funds), hedge funds collect money from multiple investors and spread the communal capital into various investments to increase the chances of a return on investment. Hedge funds are less regulated than other funds by the U.S. Securities and Exchange Commission, so fund managers are able to make investments in a very broad range of financial instruments. The Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010 created some new requirements and restrictions for hedge funds, but focused more on reporting and transparency than on where fund managers make their investments [source: Cadwalader, Wickersham and Taft].
Hedge fund managers can invest in stocks, commodities, derivatives, futures, options and all types of financial instruments. This broad leeway often brings positive returns. In 2010, hedge funds around the world climbed while many stock markets fell or made modest gains [source: Yamazaki]. However, hedge funds have a relatively steep barrier to entry in the form of minimum investments of $500,000 or more and expensive fee structures [source: Sherman]. Those who can afford to invest in hedge funds should be cautious. Not all hedge funds are volatile and high-risk, but investors should research the fund and its manager before making a commitment [source: U.S. Securities and Exchange Commission].