Why invest in hedge funds?
The main reason is higher returns, or at least the expectation of that. Since hedge funds have the flexibility to take higher risks, many often generate higher returns than traditional mutual funds.
Of course, this comes with higher risk, but hedge fund investors typically already have safer investments and are looking for something with a higher expected return.
People invest in hedge funds because they are alternative investment funds that can generate absolute returns even in a market downturn.
That is, unlike an index fund that will decline with the index, a hedge fund that uses a long-short investment strategy can still make money if the overall market declines.
The rates of success vary between hedge funds, and lately some funds have lost money in market declines, but others still managed to make a profit.
Many people invest in famous hedge funds because they are run by famous hedge fund managers.
For many investors, having a name like David Tepper or Steve Cohen is enough reason to invest in the fund. A proven track record of making money is another reason.
Many wealthy people don't have the expertise to manage their own money and hence invest in hedge funds because they believe the manager is better skilled at that.