How Do Hedge Funds Make Their Profits?

[Shyla Bernetta]

The term "hedge fund" has become used in so many different ways that there is no single answer to your question. Originally hedge funds were private capital pools designed to "hedge" the performance of their "long" portfolio (risk reduction) with short positions in other parts of the market. Their earnings would be the difference between the two gains or losses. Today the term "hedge fund" has come to be applied to many funds that do not actually hedge their investments. In fact it is applied to almost any private capital fund that doesn't invest in traditional "long" positions in stocks, bonds or other investments.

[Xanthia Alysha]

Like mutual funds, hedge funds pool investors' money and invest those funds in financial instruments in an effort to make a positive return. Many hedge funds seek to profit in all kinds of markets by pursuing leveraging and other speculative investment practices that may increase the risk of investment loss.