Like mutual funds, hedge funds pool investors' money and invest those funds in financial instruments in an effort to make a positive return. However, unlike mutual funds, hedge funds are not registered with the SEC. This means that hedge funds are subject to very few regulatory controls. In addition, many hedge fund managers are not required to register with the SEC and therefore are not subject to regular SEC oversight. Because of this lack of regulatory oversight, hedge funds historically have been available to accredited investors and large institutions, and have limited their investors through high investment minimums (e.g., $1 million).
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As stock market indices have declined, some investors have begun looking for alternative forms of investments, such as hedge funds. While hedge funds have traditionally been available only to those with significant assets, they are becoming available to a broader spectrum of investors through funds of hedge funds. As with any investment, before considering an investment in a hedge fund or fund of hedge funds, it is important that you fully understand the risks, as well as the potential rewards.