Hedge funds are generally created by a limited number of wealthy investors who agree to pool their funds and hire experienced professionals (fund managers) to manage their portfolio. These funds are private agreements and generally have little or no regulations governing them. This gives a lot of freedom to the fund managers.
For example, hedge funds can go short (borrow) funds and can invest in derivatives instruments which mutual funds cannot do.
Hedge funds generally have higher management fees than mutual funds as well as performance based fees. The management fee (paid to the fund managers), in the case of hedge funds is dependent on the assets under management (generally 2 - 4%) and the fund performance (generally 20% of the excess returns over the market return generated by the fund).
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