hedge fund

A type of investment fund with very high fees for investors and a focus on complex financial derivatives. Hedge funds charge around 20% of returns (sometimes a lot more) plus a flat fee of typically 2%. Originally hedge funds were based on the concept of risk hedging; high-yield investments are always riskier than low-yield ones, so a fund manager could presumably put all the money in one instrument with enormous risk and hope for the best. That is, to put it bluntly, insane. So the manager uses a strategy of hedging risk as cheaply as possible, such as a very elaborate combination of derivatives that rise in value if the main asset declines in value. Hedge funds are organized to be very exclusive, requiring a very long commitment and limited membership. The managers are much more daring and will take much more aggressive risks than mutual funds.