A hedge fund is an alternative investment vehicle that employs numerous different strategies in order to achieve a positive return, called “alpha“, for its investors.
These kind of funds are actively managed and they usually make use of derivatives and high leverage with the goal of enhancing profits from trades.
Hedge funds are generally only accessible to accredited investors as they require less SEC regulations than other funds, like, for instance, mutual funds.
Legally speaking, hedge funds are most often set up as limited partnerships and require a large initial minimum investment to their investors. They are also considered illiquid assets, as they often require investors to keep their money in the fund for at least one year, a time known as the “lock-up period”; withdrawals might be allowed only with some well-defined limitations.
The first hedge fund was launched by Alfred Winslow Jones in 1949 with only $100,000 (including $40,000 out of its founder’s pocket) and had the purpose to minimize the risk holding long-term positions, while at the same time short selling other stocks, a practice known as “hedging“; Jones also employed leverage to enhance returns.
In the 1960s hedge funds dramatically outperformed most mutual funds, gaining a lot of popularity in the process. However, as time passed by, in an effort to maximize returns, many hedge funds turned away from Jones’ strategy, which placed great importance on hedging, and chose instead to engage in riskier strategies. These tactics led to heavy losses in the late 1960s and early 1970s, forcing a large number of hedge funds to close during the bear market of 1973-74.
The industry was relatively quiet and stable for more than two decades until a 1986 article showed the double-digit performance of Julian Robertson‘s Tiger Fund. Again, hedge funds were made the stars of the financial field, and investors went back to a sector that now offered thousands of funds and an ever-increasing array of new and exotic strategies, including currency trading and derivatives such as futures and options.
Unfortunately, history repeated itself in the late 1990s and early 2000s, as a number of high-profile hedge funds, including Robertson’s, failed in spectacular fashion. Since that time, the hedge fund industry has grown substantially. Today the hedge fund industry has total assets under management valued at more than $3.2 trillion.
The number of operating hedge funds has grown as well, with over 10,000 of them operating in 2015.
Sources:
EconoUniverse 
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