Hedge funds use alternative strategies such as selling short, arbitrage, trading options or derivatives, using leverage, investing in seemingly undervalued securities, trading commodity and FX contracts, and attempting to take advantage of the spread between current market price and the ultimate purchase price in situations such as mergers. Hedge funds can be extremely risky investments.

Hedge funds are typically structured as limited partnerships. The hedge fund manager is the general partner and the investors are the limited partners. The funds are pooled together in the partnership and the general partner(hedge fund manager) makes all the investment decisions based on the strategy the hedge fund manager has outlined in their offering documents. In return for managing these funds, the hedge fund manager will receive a management fee and an incentive fee. Typically the management fee ranges from 1-2% of the assets under management. The incentive fee is usually 20% of the profits of the fund and can include "hurdles" or other items.

The amount of money managed by funds that can be termed hedge funds passed the $1 trillion mark during 2004, according to the Alternative Fund Services Review. The industry continues to grow with institutional investors increasing their allocations to hedge funds as a way to achieve absolute returns.

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