As an investment banker, our brokerage deals with many hedge funds.
Typically they are available to wealthy (accredited) investors, who use them as a portfolio management tool to place bets on market trends or to protect against exposure other assets they own may carry (hedge).
In a sense they are like mutual funds on steroids.A mutual (or pension) fund typicallylooks to create value over the long term with a minimum of risk by owning (long) various securities such as stocks, bonds, real estate, commodities, etc., while trying to preserve existing value.
Hedge funds will position themselves (whether they think it will go up or down) around a particular segment of the economy (eg. oil & gas) using leverage, options, derivatives and the like.
When they bet correctly, they can have huge returns (> 100%), when they are incorrect they can have massive losses (google "amaranth partners").
They are a dangerous part of the market for most investors as they do not have the same type of disclosure or performance reporting guidelines as regulated mutual funds. However, since most require initial investments of >$100,000 it is largely a game played by the already wealthy.
Let me know if you have any more specific questions.
Best,
~bug
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