Mutual funds can short-sell (I think up to a maximum of 30% of profits or some arbitrary number). There are also mutual funds from Rydex and Proshares that return the inverse of some indices, so I am not sure how they can get away with this. Maybe they never profit more than 30%?  They can also use leverage, but to a much smaller degree. Some funds that seem to blur the line between hedge and mutual:
PCRIX - profits from commodity instruments
Rydex Inverse Dynamic S&P 500 - Inverse fund that seeks 200% of the daily performance of the S&P 500® Index.
So, it seems to me the only difference between a hedge and a mutual fund is basically disclosure and SEC registration. It seems sorta like people paying for the exclusivity of being in a select club, and proving they have a high net worth.
I guess the argument can be made that it is another asset-class, and overall provides diversification benefits since it has more of a range of investments it can make, but it just doesn't seem like a prudent investment for a person with "just enough" to get into a hedge fund expecting to beat the market overall.
And sure, you can make the arguments that there are the T Boone Pickens of the world, just as you can say there are Warren Buffets. But, try to predict the next Pickens or Buffet, and if you find them in advance, please let me know!
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