A hedge fund is an investment vehicle that tries to make money in both up and down markets.
There are so many different hedge fund strategies that it makes it a difficult phrase to define. The most common type of hedge fund is long-short equity. A long-short equity fund buys stocks they think will increase in value and shorts stocks they think will decrease in value. Many arbitrage strategies are also very popular, where fund managers take advantage of anomalies in asset prices. Some examples include convertible bond arbitrage and merger arbitrage.
Hedge funds typically charge a 2% management fee, plus a performance fee of 20% of any increase in the fund’s value. Most hedge fund managers also have the majority of their net worth invested in their hedge fund, aligning the the risk of their investors with themselves. Hedge funds are generally unregulated investment vehicles, but that change is starting to change.