Hedge Funds are investment funds with a variety of investment objects and strategies. Investment objects could be stocks, bonds, currencies and derivatives. In addition, Hedge Funds can go short and use credits to take advantage of the leverage-effect. By doing so, Hedge Funds try to maximize their absolute return rather than focus on a benchmark. With these strategies they try to make profits even when markets drop. Thus, they offer interesting alternatives to diversify a portfolio. Note that one should not mix up Hedge Funds with hedging-strategies of futures trading.
Hedge Funds have a lack of transparency. The proper choice of the manager is quite crucial since Hedge Funds extremely rely on the skills of a manager (alpha) rather than the market environment (beta). According to a survey by Preqin, the performance of Hedge Funds quite often hit the expectations of investors during the past couple of years.