A hedge fund is an aggressively managed portfolio, similar to a mutual fund, of high-risk securities that has as its goal a very high return on investment. It should be noted that, according to finance theory, generating a high return on investment implies taking on a high degree of risk. As stated, hedge funds are aggressively managed in order to generate a high return. This involves taking long, short, and derivative positions in high-risk securities in both international and domestic markets.
All hedge funds are not the same and many use different investment strategies. Investment returns and the strategies hedge fund managers employ to try to receive their returns vary tremendously. Some hedge funds say they try to maximize their return and minimize risk. All investment managers do this, whether they are hedge funds or not. The fact, however, is that the higher the promised return, the more risk you have to take.
Hedge funds, because they are typically not regulated, can typically take advantage of any opportunity in the market, with stocks, bonds, derivatives, options, currencies, interest rates, and other countries' economic policies, in order to maximize returns. Many of these strategies are very risky.
The fact of the matter is that most hedge funds do not use these terribly risky strategies to increase their investment returns. Instead, they administer their hedge funds responsibly. It is a small percentage of hedge funds that give other hedge funds a bad name. Many hedge funds have outperformed the equities market with less risk and less leverage.
Hedge funds are usually restricted to accredited investors and have a high minimum investment.
Some of the financial problems which caused the Wall Street meltdown was the inappropriate use of hedge funds.
