Which of the following is a characteristic of hedge funds compared to traditional funds?

Hedge funds are distinct from traditional funds, particularly in their investment strategies and practices. One defining characteristic of hedge funds is their frequent use of derivatives to enhance their investment approaches. This often allows hedge funds to achieve greater flexibility in their strategies, enabling them to hedge risks or amplify their returns, unlike many traditional funds which may be more restricted in their investment methods.

The utilization of derivatives can take various forms, such as options, futures, and swaps, and serves a variety of purposes, including speculation and hedging against market movements. This capability is part of the broader investment mandate that defines hedge funds, allowing them to pursue more complex strategies that can adapt to changing market conditions.

In contrast to hedge funds, traditional funds such as mutual funds typically focus on long-only investing and have more stringent regulations regarding their investment practices, including limitations on the use of derived instruments. This difference illustrates how hedge funds can employ more dynamic and aggressive investment tactics than their traditional counterparts, aligning with the assertion that they generally use derivatives to enhance strategy.