Houston Chronicle – Hedge funds, historically an investment reserved for big-ticket investors, are seemingly like mutual funds in that they typically invest in stocks and bonds. They have the added glamour and allure, however, of taking significant risks and gambles with their investments. Hedge funds may take risks by purchasing derivatives, or they may bet on the fall in price of particular securities by selling the securities short. (When you short sell, you borrow a security from a broker, sell it and then hope to buy it back later at a lower price.) Some hedge funds even invest in other hedge funds.
Earlier this decade, hedge funds got lots of attention, and plenty of wealthier investors were throwing big bucks into them. The allure was hedge funds claiming to have sidestepped the bear market in the early 2000s.