Meltdown 101: How does a hedge fund work?

AP – The arrest of a billionaire in an insider trading case last week drew new attention to hedge funds — investment firms that, for many, evoke an exclusive world where the super rich use exotic investing techniques to grow yet richer.

The understanding usually stops there.

In the case against Raj Rajaratnam, federal prosecutors accused the portfolio manager for the Galleon Group of using a powerful Rolodex of contacts to acquire insider information to trade securities. Five other hedge fund managers and corporate executives were charged in the case, and prosecutors suggested the problem could be more widespread.

On Thursday, a lawsuit was filed claiming that Rajaratnam also used his money to help finance Sri Lankan rebels.

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