Unlike mutual funds, which are passively managed to track the market, hedge funds are actively managed to beat the market. Hedge funds seek an absolute return, while mutual funds are concerned with a relative return to beat an index (ie. S&P 500). As a result, while a mutual fund tends to do slightly better or worse than the overall market, a hedge fund can significantly beat or trail the overall market.
Example:
Overall market: Up 5% for the year
Sample Value ranges:
S&P 500 Index fund: Up 5.3%
General Equity Fund #1: Up 7%
General Equity Fund #2: Up 4%
Hedge Fund #1: Up 20%
Hedge Fund #2: Down 30%
Major Differences between hedge funds and mutual funds
Three main lines of business important to hedge funds
Portfolio Management
Four main hedge fund strategies