Hedge funds are a type of high risk fund in which managers use complex market strategies such as leverage, long, short and derivative positions with the goal of high returns. Management fees are typically 1-2% in addition to a share of any profits from the fund, usually about 20% [1]. Hedge funds are mostly unregulated and do not have to register with the SEC, which allows managers to use strategies not allowed for mutual funds. US law also requires a majority of share holders to be accredited investors, meaning they must meet specific asset requirements. Often hedge funds require a minimum investment which can be 1 million dollars or more. There are often limitations to when you can cash in your shares and most hedge funds require a lock in period of about 1 year.
The SEC recommends that you perform a thorough background check on the fund managers before investing. You can find this information on the SEC's Investment Adviser Public Disclosure website.
Sources:
1. http://www.investopedia.com/terms/h/hedgefund.asp
2. http://www.sec.gov/answers/hedge.htm
3. http://www.pbs.org/now/shows/315/hedge-funds.html
