An idiot’s guide to hedge funds

As a follow up to recent articles published in this magazine on fund managers, such as Philippe Jabre and Marc Hochar, and the numerous mentions in these articles of hedge funds, we thought we should shed some light on the meaning or definition of hedge funds, their origins as well as their characteristics.In the financial community, the term “hedging” usually refers to entering transactions that protect against adverse price movements. A “hedge fund” could thus reduce risks through a strategy that acts as an insurance policy, and brings the level of investment risk to a minimum. However, the term “hedging” or “hedge” is very misleading as most hedge funds nowadays use strategies which are not at all “hedged” or without risk. In fact, most hedge funds only “hedge” part of their exposure to a specific market or product (whether its equities, bonds, interest rate products, etc.) and follow specific sophisticated