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Hedge funds are a type of collective investment catering to the very wealthy as a means for them to increase their chances of earning greater profits while lowering risk. A hedge fund manager is the person who oversees the hedge fund and takes proactive methods to hedge the investment strategy.

Strategies of hedge funds

One such measure a hedge fund manager may implement to hedge and investment is short-selling. Short selling is when the seller sells a financial instrument they do not own at the time of the sale with the intent of buying it later at a significantly lower price. That is one of the most common strategies utilized when it comes to hedging investments.

The development of hedge funds

The basic concept of hedging investments was developed byAlfred Winslow Jones. Jones was a sociology student who was working on his thesison industrial relations. He later took that concept and turned it into a book which was picked up as a story in Fortune. That article later helped him land a job at the magazine and that experienced prompted Jones to launch his first hedge fund in 1949.

His concept of hedging investments back still translates to the basic unobtainable core value of "profit without risk." New Yorksaid Jones "...split his holdings into two groups: good stocks that rose faster than the market in good times and fell slower than the market in bad times, and bad stocks that did the opposite." As great as the philosophy was, it was not a sure thing and Jones eventually admitted that even he could not "outsmart the market."

Conceptually, hedging investments is trying to mitigate the chance of financial loss by taking unusual and risky steps to increase the chance of great financial games. Hedge funds are not an investment for those who are low on cash or scared of risk taking.

Investing in hedge funds requires gobs of cash, nerves of steal and the determination to make a profit at all costs.

This type of collective investment scheme does not need to be registered with the U.S. Securities and Exchange Commission (SEC) since hedge funds are considered private offerings because they are set up as limited partnerships. Hedge funds require the full attention of a fund manager to handle the day to day activities of monitoring the investment to help insure the greater chance of return on the investment.

Risk: you're accountable for all losses

The hedge fund manager gets paid both a management fee, typically 2 percent of the entire fund net value and a 20 percent performance fee based on the profits of the investment. Because of the huge amount of money hedge fund managers can make, one of the common risks associated with hedge funds is that the managers may be willing to take greater chances with the money invested to reap bigger rewards.

If there are losses, the manager will not be held financially accountable again providing them with more leeway to play with the money of the investors.

Risk: Fewer disclosures

Since the SEC does not require hedge funds to register with them there is really no Government protection offered to consumers involved in these investments. According to the SEC Web site, another common risk associated with hedge funds you won't get the same level of disclosures from a hedge fund that you'll get from registered investments.

Without the disclosures that securities laws require for most registered investments, it can be difficult to verify representations you may receive from a hedge fund.

All investments have some type of risk involved. Some instruments, like the stock market, risk the loss of principal, while others, such as savings accounts, risk not allowing your money to earn the most money for the investment. The most common risk associated with hedge funds is because of the large funds required to invest into one. With that amount of money, great losses are a common hedge fund risk.

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