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An investment company or mutual fund that engages in aggressive trading and investing strategies to get their rate of return. Hedge funds use techniques such as short selling of stock and option trading.
Short selling of stock is considered a high risk than long buying, because if the stock rises after it is sold short, the security could lose an umlimited amount of value. Option contracts can also expire worthless. However, if positioned well in a hedge fund investing portfolio, they can succeed and generate very large rates of return.
Investing in these pools or to buy these funds can earn investors a very high rate of return, however there are many that do not perform well - especially in certain stock market years or interest rate cycles. Hedge funds are very sensitive to these changes. Viewing a detailed prospectus on these clubs is a very important part of deciding to invest in them.
There are brokerage firms and hedge fund trading companies that specialize in them. Over the years many of them have been successful with strong track records of returns.
Some successful smaller investors have looked into starting their own hedge fund.
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