What is often the underlying aspect that defines hedge funds compared to mutual funds?

Hedge funds are indeed distinguished by their use of more complex investment strategies compared to mutual funds. Unlike mutual funds, which generally have to adhere to specific regulations limiting their investment options and strategies, hedge funds are typically less constrained and can utilize a broader range of strategies. These may include short selling, leverage, derivatives, and other alternative investments.

This ability to engage in complex strategies allows hedge funds to seek high returns, often in varying market conditions. They may also employ hedging techniques to offset potential losses, which adds to their complexity. This gives hedge funds the potential to provide greater returns, albeit with higher risk, compared to traditional mutual fund approaches, which typically focus on long-only equity or fixed-income investments.

The other options do not correctly capture what fundamentally differentiates hedge funds from mutual funds. While hedge funds do often have lower fees relative to some high-cost mutual funds, they can also have management and performance fees that are significantly higher than those of mutual funds. Hedge funds have a reputation for being less regulated, which is contrary to the first option. The suggestion that hedge funds primarily invest in cash is misleading, as they are known for a diversified portfolio that often includes equities, bonds, and other instruments.