Hedge funds can employ many strategies and focus on virtually any kind of investing style or market. They also have the flexibility to change their strategy as they see fit.

Morningstar and other services will group hedge funds into categories and provide benchmarks based on their average performances. As of 2016, there are over 12,000 hedge funds, and over half of those are required to report to the SEC.

This allows Morningstar and other services to mine the data to arrive at benchmarks for various categories of hedge funds. There are many categories that they use, but the main ones have to do with strategies such as Directional, Market Neutral, Arbitrage, Global Macro, and Event-Driven strategies.

Some look for distressed debt, or are short-only, For example, Event-Driven Hedge Funds employ a strategy focused on companies that are involved in special situations such as restructuring, merger and acquisition, natural disasters, political upheavals, etc.

Another example is Short-Selling Hedge Funds - they use a strategy in which managers will take only short positions in overvalued securities. Macro strategies use a top-down approach to global markets and make plays on currencies, interest rates, commodities, and other macroeconomic factors.

There are also funds of hedge funds that give investors a great diversification within this arena. Today, you can also invest in ETFs and mutual funds that mimic and track hedge fund strategies.