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The term "hedge fund" is based on the idea money managers can hedge their bets to ensure a profit, regardless of whether the market goes up or down. Though hedge funds recently have become more popular than ever, the first was created more than 50 years ago: In 1949 money manager Alfred Winslow Jones began short-selling stocks while buying others to offset his risk.

Hedge fund managers balance their exposure by pursuing techniques such as using options or futures, or simultaneously holding long positions while also short-selling. What distinguishes them from traditional mutual fund managers is their willingness to push the boundaries of normal investment techniques in a quest for unusually high returns. Their result don't often closely track those of stock or bond markets. In addition, hedge fund managers are set apart by the amount of regulatory scrutiny they face - or the lack of it, some might say.

Mutual funds are widely available to the general public and must register with the government under the Investment Company Act of 1940 and the U.S. Securities Act of 1933. Thus, they’re subject to rigorous oversight by the Securities and Exchange Commission. By limiting their investors to institutions like pension funds, endowments and wealthy individuals that meet the definition of "qualified purchaser" or "qualified client" under securities law, hedge funds are often exempt from such oversight. In addition, hedge funds are limited to having 99 such qualified investors, each of which is a "limited partner." So, they’re considered private pools of capital.

For all that, it’s not wholly accurate to say hedge funds are totally unregulated, since the securities they buy and sell are generally subject to government scrutiny.

Most hedge funds follow a particular investment strategy. Popular strategies include:

Distressed: These funds buy debt (or occasionally equity) of companies in or near bankruptcy. They strive to buy securities whose market prices are below the value of company assets under a bankruptcy plan or similar reorganization.

Market Neutral: This strategy rests on hedging bets - owning one group of securities the fund manager believes will perform relatively better, while short selling other, borrowed securities he believes will do worse. The difference in performance can create profit even if the values of both the long and short portfolios rise or fall.

Global Macro: Instead of focusing on the movements of particular stocks, global macro funds create and manage portfolios based on their reading of worldwide political and economic trends.

Event-Driven: Managers using this strategy aim to profit from one-off events, such as mergers, acquisitions or leveraged buyouts.

Hedge funds are considered risky because they use borrowed money (known as "leverage") to pump up returns, can hold long or short positions, and put money into illiquid investments. To counter this risk, some investors put their money into "funds of funds," which spread their money - and supposedly, their perils - across several different funds.

Although hedge funds have enjoyed impressive growth since the early 2000s, other investment vehicles have cut into their popularity. Wealthy investors in particular can now take advantage of private equity, long-only funds, which offer competitive returns with lower management fees. Private equity funds are behind the recent wave of public companies whose shares have been "bought out." After these firms have been taken private, the wealthy and institutional investors in their owner funds share their profits. Later, these companies may be re-offered to the public via an initial public offering, which provides another source of profit for the investors.

On the whole, the alternative investments sector appears to be holding up better than investment banks amid the turmoil that has beset financial markets since the middle of 2007. However, neither hedge funds nor private equity firms have been immune. Several funds were forced to close shop due to failed bets during 2007 and the early months of 2008.

What's more, although the influx of new money from institutions and wealthy individuals remains robust, both hedge funds and private equity funds may have a harder time maintaining returns during 2008 and 2009. Funds tend to borrow heavily from banks to magnify returns on the portfolios they hold - and banks, after taking huge losses from their home mortgage lending business last year, began applying much tougher credit standards to other borrowers. Less-plentiful credit brought a steep slowdown in debt-financed acquisitions of companies, known as "leveraged buyouts" or "LBOs" - a special province of the largest private equity firms.

One of the first widely noted signs of an incipient credit crunch was the failure of two hedge funds run by Bear Stearns in the summer of 2007. Those two funds, which owned bonds built from mortgage loans, were wiped out when rising numbers of homeowners fell behind on mortgage payments.

Hedge funds are still drawing top talent. In New York, recruiters target investment banks as well as other hedge funds when searching for experienced people, since the skill sets sought by both funds and banks are often similar. However, the investment banks generally have more conservative bonus structures, are more risk-averse than hedge funds, and are subject to complicated compliance procedures. For some, all of this makes working at a hedge fund extremely attractive. However, traditional investment banks are countering by creating their own in-house hedge fund groups and restructuring their compensation packages to remain competitive with the alternative funds.

Roles and Career Paths

Jobs in hedge funds tend to fall into five categories:

- Analysis: Analyzing the companies, markets and securities a hedge fund invests in.
- Sales and Marketing: Meeting with investors to help sell the strengths of the fund.
- Portfolio Management and Trading: Executing the investment strategy, buying and selling financial products according to analysts’ recommendations.
- Risk Management and Back Office: Settling trades, working out risk exposure and making sure everything flows smoothly. Many small funds outsource these tasks to the prime brokerage divisions of investment banks.

Most roles are quite distinct: If you join as a risk manager, the chances of becoming an analyst are slim. On the other hand, it’s not unknown for analysts to become traders.

Unfortunately, hedge funds rarely hire people fresh out of school. Most are small organizations that lack the time or resources for extensive training. New graduates would be better served trying to join an investment bank to gain a year or two of experience that will be attractive to a hedge fund.

Skills and Qualities

- Math aptitude
- Adaptability
- Creativity