Canadian Securities Course (CSC) Practice Exam

Hedge funds are known for their investment strategies that often involve a variety of techniques, one of which is the use of leverage. Leverage allows hedge funds to amplify their investment exposure by borrowing funds to invest more than what they have in capital. This can lead to higher potential returns; however, it also increases the risk. The use of leverage is a key characteristic that differentiates hedge funds from other types of investment vehicles, as many conventional mutual funds do not utilize leverage to the same extent or at all.

In contrast, hedge funds are generally not restricted to government bonds, and while some may invest in those, they have the flexibility to invest in a wide array of asset classes, including equities, derivatives, and real estate. They are also not typically open to the general public; investment in hedge funds is often limited to accredited investors or institutional investors, which helps maintain a level of exclusivity. Furthermore, hedge funds do not provide fixed interest payments; instead, they often seek to generate absolute returns, which may come from capital gains rather than fixed income sources. Thus, the characteristic of employing leverage to enhance returns is a defining feature of hedge funds.