What defining characteristic of a directional hedge fund?

A directional hedge fund is defined by its strategy of attempting to forecast market direction. This means that the fund takes positions based on the anticipated movement of a particular asset or market, either long (buying) or short (selling), depending on whether it believes prices will rise or fall.

This characteristic is crucial because it distinguishes directional hedge funds from other investment strategies that may play a more neutral role, such as arbitrage, which seeks to profit from price discrepancies rather than market movements. Additionally, directional hedge funds are actively engaging in market speculation; they thrive on market volatility and shifts in market sentiment, making them inherently speculative in nature.

In contrast to the other options, which describe different approaches to investing or specific limitations of investment strategies, the core of a directional hedge fund is its proactive stance on market predictions, making option A the defining characteristic.