Definition

The term "Hedge Fund" is a colloquialism derived from the expression "to Hedge one's bets", which means to limit the possibility of loss on a speculation by betting on the other side. The Webster's College Dictionary defined Hedge Funds as those that use "high-risk speculative methods". The term Hedge Fund is not a legal term but rather an industry term. Therefore, no universally accepted definition is available for it; however, various industry participants interpret it differently. Some of the definitions given by popular sources are as follows:

The term, ‘Hedge Fund' refers to "any pooled investment vehicle that is privately organized, administered by professional investment managers, and not widely available to the public" - in a report on the LTCM affair, ‘The President's Working Group on Financial Markets', 1999.

"A Hedge Fund is a ‘pool' of capital for accredited investors only, and organized using the limited partnership legal structure. The general partner is usually the money manager and is likely to have a very high percentage of his/her own net worth invested in the Fund." Hennessee Group LLC.

"The term ‘Hedge Fund' includes a multitude of skill-based investment strategies with a broad range of risk and return objectives. A common element is the use of investment and risk management skills to seek positive returns regardless of market direction." Hedge Funds Demystified, Goldman Sachs & Co.

The term, ‘Hedge Fund' is misleading in that a Hedge Fund does not necessarily have to Hedge; it now means any type of private investment partnership. Hedge Funds are typically established as limited partnerships, limited liability companies, or limited liability partnerships, bound by investment agreement that investors sign with sponsors of the Fund. Hedge Funds are not subject to direct prudential regulations and disclosures. The approach of Hedge Fund managers is different from traditional managers; they can employ various kinds of strategies, styles, techniques, and instruments, which carry wide spectrum of risk-return profiles. Therefore, some of their strategies might carry high risk and volatility complied by high return characteristics. Whereas, others' strategies could be conservative and employ strategies that seek to reduce market risk. Many Hedge Funds are highly specialized ‘niche' players and are totally focused on the expertise of the management team in a specific area to manage Funds.