The main purpose of this paper is to explore the investment strategies of hedge funds and figure out why these strategies are powerful. Also, the study will compare the risk and return performances of hedge funds to the traditional investments. The paper used qualitative and quantitative methods to determine the results. The qualitative part discusses the performance, characteristics, and regulations of hedge funds. In addition, the quantitative method sought the alpha of hedge funds by running multiple linear regression of the excess returns of the hedge funds as dependent variable, and excess returns of the market, high minus low, small minus big, and momentum as the independent variables. The study found insignificant alphas for the main hedge funds’ strategies attributed to the diminishing abnormal returns of hedge funds. Moreover, the results of the historical data show that hedge funds exceed the traditional strategies in terms of both returns and risks.

Keywords: Hedge Fund, Investment Strategy, Performance, Alpha