Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- and large-cap equities (foreign or domestic), artwork, raw land, real estate, commodities, currencies, Treasurys and municipal securities.

Maximize Returns

Hedge funds are considered alternative investments that are generally intended to maximize returns for investors by engaging in aggressive strategies not normally found in other investment vehicles, such as mutual funds. As such, they can invest in high-risk/high-return vehicles, such as penny stocks and other types of securities that can be illiquid and too risky for the typical investor.

Hedge funds are most often established as private investment limited partnerships, with the managers acting as general partners controlling day-to-day management and investment activities. Many hedge funds utilize leverage to attempt to drive alpha (returns) – a practice that can substantially increase risk in the portfolio.

Hedge funds are considered to be illiquid investments. Most hedge funds require lengthy lock-up periods (no access to funds), as well as restrictions thereafter on how much investors (limited partners) may withdraw from the fund and when those withdrawals can be made.


Comparatively speaking, hedge funds are highly unregulated, allowing them to engage in activities that are restricted in other types of investment vehicles. Combined with the higher levels of risk and their illiquid nature, they are considered unsuitable for the typical investor. As such, they can only be purchased by a limited number of accredited investors (e.g., wealthy individuals, endowments, pension funds) that the Securities and Exchange Commission (SEC) deems to have the financial wherewithal to sustain the increased potential for loss and who are considered sophisticated enough not to require the typical regulatory disclosures required by law for most other investment vehicles.

  1. Are there publicly traded hedge funds?

    See why a privately arranged hedge fund may decide to take its fund public, and how the investing public at large can gain ... Read Answer >>
  2. What happens if you don't hedge your investments?

    Learn the purpose, advantages and disadvantages of hedging, and find out how to utilize hedging to enhance an overall investment ... Read Answer >>
  3. Do hedge funds invest in mutual funds?

    Learn whether hedge funds invest in mutual funds. They are permitted to invest in mutual funds but usually avoid doing so ... Read Answer >>
  4. Where does a hedge fund get its money?

    Learn how a hedge fund is structured and how the managing partner of the fund goes about the process of finding and soliciting ... Read Answer >>
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