A hedge fund is:
An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).
Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year.
Alfred W. Jones created the first fund in 1949. Jones, an Australian, came to Columbia University and earned a Ph.D. in Sociology. Hedge funds gained momentum in the 1970s and have rapidly expanded in prominence and value ever since. Ironically, the term hedging reflects the practice of attempting to reduce risk, though the primary objective of most hedge funds is to maximize return on investment, which often runs counter to the aversion of risk. And, hedge funds are not as heavily regulated as mutual funds, as they are pools of accredited investors (required to possess net worth of more than $5 million and other criteria.)
But, what happens when either misguided, or marginally responsible, individuals arrive at this nexus of minimally regulated financial power?
Long Term Capital Management (LTCM) happens.