A "hedge fund" is a pool of investment with a common goal to get the highest possible rate of returns. This means that different investors come together to park their money in a common fund privately with an aim to optimize returns. As the name itself include hedge, the investment of the pooled fund is done in using their different strategies to increase the returns. This might sound similar to a mutual fund, but the minimum investment required in the hedge is far more than a mutual fund, which is Rs. 1 crore.
The diversification strategy of a hedge fund is wide and vast ranging from derivatives markets to stock markets, to international market and many more. Mostly, wealthy investors and institutional investors opt for the hedge funds as the minimum investment is Rs. 1crore.