Definition of hedge funds

Investment fund that aims to meet high targeted returns (absolute returns) using aggressive trading strategies, often across several asset classes. Hedge fund managers can take both long and short positions to maximise returns (long/short funds) or use other methods, sometimes purely speculative. The need to achieve high returns can involve the movement of large amounts of funds from one market, asset class or currency to another, involving a high degree of risk to the investor.

Hedge funds typically use a high degree of leverage and borrow to increase the amount of money they can risk and hence magnify the fund's returns. In the hedge fund industry's early days, high net worth individuals were the main investors but now institutions such as pension funds invest their money in the funds to boost annual returns. Funds of hedge funds (see funds of funds) are marketed by investment banks and other asset managers as a way to spread investor risk across several hedge fund strategies.