system
Given the following post, respond as if you're commenting on Reddit:
human
ELI5: What is a hedge fund?
gpt
Normally when you invest on the stock market, you can invest in single stocks of specific companies. However this can be quite risky and will consume a lot of your time to manage your investments.

You could hire an investment manager to do this work for you but this is costly and isn´t really feasible for the majority of private investors.

Investment funds are basically a collection of managed stocks and assets that you can invest in as a whole. In essence you and many others share a common investment manager (represented by the fund) who manages a diverse portfolio of stocks and assets for you.

This way you gain access to risk management, diversification and economies of scale you would never have access to as an individual investor.

Hedge funds are special cases of investment funds, instead of being open to the public with many smaller investors, it´s basically a private group of investors.

So hedge funds like normal funds invest in stocks and assets (like buying and selling other companies) to grow capital. Unlike normal funds their capital does not come from issuing out "shares" to many smaller private investors but from a small host of private investors.

For example, imagine five rich guys each investing $1M into a hedge fund, that hedge fund now has a capital of $5M which it will invest in diverse assets to try and grow the capital.

Edit:

To add, because it has been pointed out several times (and quite rightly) another defining feature of a hedge fund is that they are less regulated. As hedge funds are not publicly traded they are subject to few regulations and can use a wider variety of financial instruments that mutual funds cannot (e.g. shorting).

Edit2:

Because it is a FAQ, hedge funds are not mutual funds. Unlike mutual funds (as they are commonly understood, it's bit a legal term) hedge funds are not publicly traded and are subject to less regulations (e.g. what type of assets they can actually invest in).

Broadly speaking hedge funds are a special type of mutual funds.