Hedge fund

[Gin96]

Does anyone on here know how they work and can explain it to me?

Hedge funds are investment companies who use a variety of financial tools to generate high returns. The funds are investments from large institutional investors or very wealthy individuals all pooled together and the hedge fund manager then finds creative ways to try and generate a high return. The big difference with normal investment funds is there is no regulation as to how highly leveraged the fund can be which makes them high risk.

The term hedge fund comes from how managers can hedge their risks when 'shorting' or 'longing' for example.
Think of it like being a bookmaker and someone lays a huge bet with you. If you are worried that bet may come off you will then lay a bet with someone else to cover some/all of those risks, hedging your bets.

A real life example of hedge funds at work was "Black Wednesday". Britain was in recession and Sterling was in a weak position trying to stay with the parameters of the ERM, (the forerunner to the Euro) Investors were shorting Sterling heavily. Despite raising interest rates 5% in one day to try to stay within the ERM the UK Government eventually pulled the plug and withdrew Sterling, reversed the interest rate rises and the pound went into free fall.
Hedge funds made billions that day.