Hydroxy fatty acids (HFAs) are very important chemicals for versatile applications in biodegradable polymer materials and cosmetic and pharmaceutical industries. They are difficult to be synthesized via chemical routes due to the inertness of the fatty acyl chain. In contrast, these fatty acids make up a major class of natural products widespread among bacteria, yeasts, and fungi. A number of microorganisms capable of producing HFAs from fatty acids or vegetable oils have been reported. Therefore, HFAs could be produced by biotechnological strategies, especially by microbial conversion processes. Microorganisms could oxidize fatty acids either at the terminal carbon or inside the acyl chain to produce various HFAs, including alpha-HFAs, beta-HFAs, mid-position HFAs, omega-HFAs, di-HFAs, and tri-HFAs. The enzymes and their encoded genes responsible for the hydroxylation of the carbon chain have been identified and characterized during the past few years. The involved microbes and catalytic mechanisms for the production of different types of HFAs are systematically demonstrated in this review. It provides a better view of HFA biosynthesis and lays the foundation for further industrial production.