Investment vehicles that are subject to hardly any restrictions in terms of investment instruments and investment policy. Hedge funds typically use hedging instruments (short sales on futures or options) and pursue active investment strategies. In many cases, hedge funds are characterised by the fact that their returns do not move in parallel with the returns of conventional investment instruments (low correlation). This makes it possible to achieve a diversification effect (lower portfolio risk for a given return). Compared to other investment funds, however, the risk of hedge funds is more difficult to measure (no representative statistics). Hedge funds can be divided (although not conclusively) into the following segments:

• Fundamental long/short funds look for undervalued or overvalued securities and buy or sell them.
• Quantitative long/short funds use statistical correlations to achieve a profit by buying or selling securities.
• Arbitrage/relative value funds look for unjustified valuation differences between similar investment instruments and sell the overvalued securities or buy the undervalued securities.
• Macro funds take positions according to their assessment of global macroeconomic developments. Investments in foreign currencies and market indices (mostly through futures) are common.

Funds of funds collect money from investors and invest it in various successful hedge funds. By spreading the money over several hedge fund managers, the risk is supposed to decrease. However, experience has shown that too broad a diversification means that the overall return of such a fund is again more determined by the performance of conventional investment markets. In other words, the correlation to the conventional investment markets increases. When investing in funds of funds, attention should therefore be paid to the correlation of historical returns, e.g. to the stock markets.