There is no exact definition to the term “Hedge Fund”; it is perhaps undefined in any securities laws. There is neither an industry wide definition nor a universal meaning for “Hedge Fund”. Hedge funds, including fund of funds, are unregistered private investment partnerships, funds or pools that may invest and trade in many different markets, strategies and instruments (including securities, non-securities and derivatives) and are not subject to the same regulatory requirements as mutual funds.

The term “hedge funds”, first came into use in the 1950s to describe any investment fund that used incentive fees, short selling, and leverage. Over time, hedge funds began to diversify their investment portfolios to include other financial instruments and engage in a wider variety of investment strategies. However, hedge funds today may or may not utilize the hedging and arbitrage strategies that hedge funds historically employed, and many engage in relatively traditional, long only equity strategies.

Hedge funds are considered an "alternative investment" vehicle. The term "alternative investment" is the general term under which unregulated funds operate; this includes private equity and real estate funds. Mainstream funds are investment funds that everyday investors can purchase; mutual funds are the prime example of a mainstream fund.

Hedge funds have attracted significant capital over the last decade, triggered by successful track records. The global hedge funds volume has increased from US $ 50 billion in 1988 to US $ 750 billion in 2005 yielding an astonishing cumulative average growth rate (CAGR) of 24 %. The global hedge fund volume accounts for about 1% of the combined global equity and bond market. Hedge funds are a growing segment of asset management industry and increasingly becoming popular not only with high net worth individual investors but also with institutional investors including university funds, pension funds, insurance and endowments. Hedge funds are sometimes perceived to be speculative and volatile. However, not all funds exhibit such characteristics.

Over the past decade, hedge funds have grown tremendously in terms of assets under management and also garnered a lot of media attention. Despite their growth and popularity, hedge funds still remain a mystery to many people who do not understand exactly what they are and how they work.

During the early years of the hedge fund industry (1950's - 1970's), the term `hedge fund' was used to describe the `hedging' strategy used by managers at the time. "Hedging" refers to the hedge fund manager making additional trades in an attempt to counterbalance any risk involved with the existing positions in the portfolio. Hedging can be accomplished in many different ways but the most basic technique is to purchase a long position and a secondary short position in a similar security. This is used to offset price fluctuations and is an effective way of neutralizing the effects of market conditions.

Today, the term `hedge fund' tells an investor nothing about the underlying investment activities, similar to the term `mutual fund'. So how do you figure out what the hedge fund manager does? You are able to figure out a little more about the underlying investment activities by understanding the trading/investment strategies that the hedge fund manager states he trades. The "investment strategy" is the investment approach or the techniques used by the hedge fund manager to have positive returns on the investments. If a manager says he trades long/short equity, you know he is buying undervalued equities and selling overvalued equities.

So what exactly is a hedge fund manager and what do they do? A hedge fund manager is normally the founder and the key person in charge of overseeing the whole operation of the hedge fund. This would mean that he/she would be responsible for overseeing the portfolio, often making trading decisions, hiring personnel, monitoring the risk of the portfolio and ensuring that the accounting and operations departments are in order. The hedge fund manager is often referred to as the principal or president and can also be called the portfolio manager.

Hedge funds vary in size from assets under management from as little as $1 million to over $10 billion. Unlike at a typical investment bank, the roles of the employees at hedge funds are not the same for each hedge fund. Someone entering an investment bank as a trader will likely have a similar role to someone else entering another investment bank as a trader. Traders at hedge funds are likely to have different responsibilities, which are usually determined by the size of the fund. At a smaller fund, the trader is much more likely to be involved with the operations of the trade whereas a larger hedge fund would have a separate operations person to handle this element. A smaller hedge fund may have 3- 4 employees whereas a larger hedge fund may employ over 300 people.