The first hedge fund was developed in 1949 by Alfred Winslow Jones, who used short positions to offset the downside risk of long holdings in equities, effectively “hedging” the risk in his portfolio.

Today the term hedge fund has come to encompass a wide range of alternative investment strategies and approaches that try to create value through trading skill rather than exclusively through appreciation.

For instance, hedge fund managers employ strategies that aim to:

• take advantage of pricing anomalies between related securities
• engage in momentum investing to capture market trends
• capture profit opportunities that arise from special situations

The ability to use derivatives, arbitrage techniques and, importantly, short selling - selling assets that one does not own in the expectation of buying them back at a lower price - affords hedge fund managers rich possibilities to generate growth in falling, rising and range-bound markets.

Because they tend not to correlate with equities or bonds, hedge funds are often used to enhance a traditional portfolio.