A form of open-end investment partnership whose main business is the investment in a range of financial securities, using a variety of investment techniques and strategies (leverage, selling short, derivatives, alternative investments, etc) in an attempt to rake in extraordinary profits with above-average risk. In this sense, a hedge fund constitutes a private pool of actively (and sometimes aggressively) managed assets, and in spite of the name, many such funds do little hedging, if any. Nonetheless, hedging means reducing average risk, but hedge funds don’t do so by investing in risk-free or conservative assets. A hedge fund manager applies sophisticated techniques to reduce risk without negatively impacting investment income. Examples of such techniques include the use of short selling (selling index futures) in order to extract stock-market risk out of the fund’s set of assets. In return for their efforts and services, the managers of a fund typically receive a percentage of any profits made by the fund.

By convention, hedge funds are subject to light regulations. In some countries, hedge funds have a limited number of holders (typically limited partners) and must meet a set of criteria in terms of a partner’s net worth, minimum invested funds, etc.

The first hedge fund was established by Alfred Winslow Jones (his money-managing firm was dubbed so by Fortune magazine in 1966). In effect, he managed to find a way to remove the risk from his market investments by buying the shares of stocks expected to increase in price while selling short the stocks expected to decrease. With this strategy, he could mitigate much of the market risk, and his fund would have stable performance over time.