Unlike mutual funds, hedge funds are only lightly regulated.

Hedge fund managers are free to make risky investments, such as buying on margin and investing in options and futures, with the potential to be very lucrative or financially disastrous.

Because of the risks involved the US Federal government restricts hedge fund participants to “accredited” investors. To be accredited you must have investments worth more than $5 million, earn more than $200,000 a year or have a cool $1 million sitting in the bank. If you don’t meet these requirements but would still like to try your hand at hedge fund style investing have a look at hybrid funds.

To the casual observer hedge funds would seem to have a long history of spectacular failure. This is not an accurate depiction though, and more a result of failure being more news worthy than success in the eyes of the major news broadcasters than a realistic view of hedge fund performance. Some hedge funds have long histories of successfully outperforming index funds. The Quantum Fund, a financial entity created by George Soros, has reported a return of more 33% a year for more than 20 years. Try getting that kind of return on your money from the bank.

So are hedge funds safe? As so often happens in both investing and life, the answer is both yes and no.

Hedge funds are unregistered investment companies and they are not subject to the same types of SEC investor safety restrictions as mutual funds. Hedge funds have much more freedom to use leverage and to short-sell stock. The use of these strategies give hedge funds the potential to be a more lucrative investment than mutual funds and also a more risky investment.

Although hedge funds have the freedom of action to be a risky investment choice that does not mean that all hedge funds are inherently risky. It depends on the investment philosophy of the company.

If you are considering investing in hedge funds talk to the company manager, look closely at the funds history, exam the portfolio, then decide if hedge funds are a safe investment for you.