Banking Practice Exam 2025 - Free Banking Practice Questions and Study Guide

Hedge funds are indeed limited to a small number of sophisticated investors, which is often defined as accredited investors or institutional investors. This exclusivity comes from the complex investment strategies and higher risk profile these funds typically employ, which are not suitable for the average retail investor. Hedge funds can engage in a variety of investment strategies, including leverage, short-selling, and the use of derivatives, which can lead to higher returns but also greater risks. The intricate nature of these strategies necessitates that investors have significant financial knowledge and resources, thus why investment is generally restricted to those considered sophisticated.

On the other hand, money market mutual funds are designed for a broader range of investors, providing high liquidity and lower risk, making them more accessible to everyday consumers. Private equity funds, while also targeting sophisticated investors, are characterized by direct investments in private companies and generally have longer investment horizons, which might not fit all sophisticated investors' strategies. Risk management funds, though a legitimate type, do not inherently have restrictions on the number of investors like hedge funds do. Thus, hedge funds are the most clear-cut example of investment vehicles that limit participation to a select group of more experienced and financially capable individuals.