A hedge fund is a scheme designed to help hedge fund managers obtain billion dollar paydays through the use of leverage to make speculative bets on all manner of assets. It is an instance of heads I win and tails I don’t lose. If the wager succeeds the fund manager retains 20% of the profits. If the wager fails, the manager walks away and the investors are left with 100% of the losses.
Hopefully, you realize that I am being a little sarcastic here. The vast majority of hedge funds are run by outstanding people who are helping pension funds and institutions to generate good returns for the investments of their beneficiaries. It is true that there are and will continue to be a few bad apples, but the vast majority are providing a very useful service to ensure good returns for the retirement plans of their investors.
This is a more conventional hedge fund definition:
A private partnership of investors that utilize leverage to generate high returns
And here are a few other hedge fund definitions:
A highly flexible investment partnership consisting of a few wealthy investors that are allowed to employ speculative techniques, which are not allowed to other investors, to generate high returns
An investment fund that is only open to accredited (i.e. wealthy) investors which focuses on alternative strategies, which are dependant on alpha generation, rather than beta, and pay a performance based fee to its manager
An exclusive partnership, which is only open to institutions and high net worth individuals that focuses on generating higher returns with lower risk through strategies unavailable to retail investors
Sparsely regulated investments which trade stocks, bonds, currencies, commodities and many other non traditional asset classes in an attempt to generate returns that are not correlated to traditional financial markets
A fund that is designed to hedge away market risk by taking hedging or short positions against long positions in an attempt to generate alpha or excess return without market risk
A pooled investment structure which aims to achieve absolute returns rather than relative returns by making shrewd investment decisions
A term that is used for all many of private investment partnerships where the manager is compensated based on performance rather than size of assets under management, which tends to align the interests of the manager and investors better, reducing the principal/agent problem