A hedge fund is an investment fund that is available to a limited range of investors who embark on wider range of investment as well as trading activities instead of long-only investment funds; to this effect, and in general, such investor makes a performance fee payment to its investment manager. Each hedge fund is associated with a particular investment strategy that spells out the investment type as well as investment techniques it undertakes. As a class, it invests in a wide range of investments which includes shares, commodities and debt.

In the world of securities, Hedge fund does not really mean any use of hedging, as popularly understood; for instance, where traders on commodity use options to hedge a commodity position. In recent time (specifically in securities world), this term refers to any type of private investment company that functions under some exemptions from registration under the Securities Act of 1933 as well as the Investment Company Act of 1940. The term is mostly referred to as alternate investment vehicles, and is limited to the needs of classy high net worth private investors. Generally, hedge fund is patterned as a limited partnership with a general partner bearing the responsibilities for the activities involved in the investment as well as the daily running of the fund; and limited partners who are providing capital as investors but do not take part either in trading activities or running of the fund.

There is limited liability for the limited partners; in essence, they cannot lose more than their investment in times of bankruptcy. For the general partner, his liability is unlimited and he is responsible for the operations of the partnership. The principals of the general partners limit their liability via the use of a corporation; alternatively, they can use Limited Liability Company as the General Partner. Certainly, the liability of the principals cannot be limited from the application of the anti fraud provisions of the Federal Securities Laws.

There are no Public Offerings with Hedge Funds; they are prohibited by private offering exemption from embarking on any form of public offering. In essence, they are forbidden from general advertising; investors securing is achieved through word of mouth, registered representatives, consultants, investment advisors or brokers. Investors are either accredited investors or qualified purchasers. Generally, the Federal Securities Laws give the definition of accredited investor and qualified purchaser using minimum asset as well as income threshold which must be met prior to their qualification to be investors in the Hedge fund. Due to the fact that investment is generally limited to accredited investors or qualified purchasers (who must meet some minimal asset and/or income thresholds), it is required of the Fund Manager to collate background information pertaining to prospective investors to ascertain whether they measure up to the least requirements to become accredited investors or qualified purchasers.

Contrary to Mutual Fund Managers, the Hedge Fund Manager invests into the funds under their management and thereby partakes in profit sharing as well as risks with their investors; he also receives incentive allocations on his performance.