What Are Hedge Funds and How Do They Work? Definition, Purpose & Types

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The Street

By TheStreet Staff What Is a Hedge Fund in Simple Terms? Hedge funds are sort of like mutual funds for the ultra-wealthy—they pool the money of their clients (mostly institutional and accredited investors) and then invest it in a variety of securities. Unlike most mutual funds, however, they make use of advanced trading strategies like hedging, shorting, and using leverage with the goal of generating very high returns for their wealthy clients while minimizing risk. Because they are very actively managed by experienced professional traders and seek to produce higher-than-average returns using …

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