Hedge funds pool money from wealthy investors and institutions and pursue strategies that traditional funds avoid. The first one, opened by Alfred Winslow Jones in 1949, combined long positions with short sales to reduce market exposure. The name stuck even as the strategies multiplied. Today hedge funds trade equities, bonds, currencies, commodities, and derivatives, often with borrowed money.

The legal structure matters. In the United States, most hedge funds are private partnerships open only to accredited investors and qualified purchasers. That limits regulation. The funds can use leverage, short selling, and concentrated positions that mutual funds cannot. In exchange, investors accept higher risk and limited ability to withdraw. Lock-up periods of a year or more are common.

Fees are steep. The traditional model is 2 percent of assets plus 20 percent of profits, though competition has pushed some fees down. Managers argue the fees align interests. Critics point out that most hedge funds underperform simple index funds after fees. A minority earn spectacular returns, and those managers attract most of the capital.

Hedge funds are not a single strategy. Global macro funds bet on interest rates and currencies. Long-short equity funds pick winners and short losers. Event-driven funds trade mergers and bankruptcies. Quant funds use algorithms. The label describes the structure, not the approach.