What are Hedge Funds?

A hedge fund is a private investment portfolio, usually structured as limited partnership, open to accredited investors, charging an incentive based fee, and managed by a general partner with every financial tool imaginable at his disposal. The general partner also invests his own capital. Most tend to stick to a tightly focused investing strategy, such as short selling, risk arbitrage, or playing equities with both long and short positions.

Don't be fooled by the name, true hedging refers to reducing risk. However, many hedge funds use options, short selling, and any other strategy to increase leverage and get a maximum rate of return.

On the other hand, because many hedge funds use futures, swaps, and arbitrage strategies, you could argue that they diversify away some of the investor risk from the stock market.