For example, a hedge fund can invest in nearly any and every investment instrument that exists. Many but not all hedge funds invest in derivatives-instruments that derive from an underlying security. Some of these instruments include options, futures, convertibles and warrants. Hedge funds have a high degree of flexibility in the investment strategies they employ. A hedge fund manager can use leverage, short selling, arbitrage, or a focus in a specific industry or kind of security.
Managers can be active on the long and short side of the market.
The diversity of strategies and instruments utilized by hedge funds results in the low correlation to typical equity market benchmarks. This relates to the belief that performance has more to do with superior stock selection than market direction.