Most hedge funds don’t make exceptional returns. It’s just as difficult for them to predict the future as it is for others. They have some advanced strategies, such as merger arbitrage, convertible arbitrage, etc. that are supposed to provide steady earnings and if done correctly, not blow up. Many of them have the goal of market neutral earnings. In other words, they make money regardless of the DOW or NASDAQ.

Yes, if you invest in a hedge fund, you may very well lose all your money. This is basically impossible with an index or mutual fund.