Like mutual funds, hedge funds pool investors’ money and invest in financial instruments in an effort to make a positive return. Unlike mutual funds, hedge funds are not required to register for with Securities and Exchange Commission (SEC). Hedge funds typically issue securities in “private offerings”, which are not registered with the SEC under the Securities Act of 1933; additionally, they are not required to make period reports under the Securities Exchange Act of 1934. However, hedge funds are subject to the same prohibitions against fraud as other market participants, and their managers have the same fiduciary responsibilities as other advisers.

A fund of hedge funds is an investment company that invests in hedge funds rather than investing in individual securities. Some funds of hedge funds register securities with the SEC; however these funds of hedge funds must provide investors with a prospectus and file quarterly reports.

Many registered funds of hedge funds have a much lower investment minimum than individual hedge funds, and as a result, some investors that would be unable to invest in a hedge fund directly, are able to purchase shares of registered funds of hedge funds.

An important difference between a hedge fund and a mutual fund is the fact that investors give hedge funds the freedom to pursue absolute return strategies, regardless of the performance of an index or sector benchmark – a hedge fund can engage in more aggressive strategies.

Investors should be prepared to read a fund’s prospectus or offering memorandum and related materials before considering investing in a hedge fund or fund of hedge fund. In addition, the level of risk should be understood before involving oneself in the fund’s investing strategies.