What is a "Hedge Fund"?

This is an interesting piece on Hedge Funds:

Near the end of the Depression, a 38-year-old sociology graduate student trudged off to Akron, Ohio, to research his dissertation on industrial relations. Nobody could have predicted what would transpire over the next decade. Alfred Winslow Jones turned his dissertation into a book, which turned into a story for Fortune, which turned into a job at the magazine, which was his initiation into the world of business and led to the founding of the world鈥檚 first hedge fund in 1949. Yes, the low-rent precincts of sociology, the Rust Belt, and journalism all played a part in creating the financial rocket ship of our times.

The term that Jones used was 鈥渉edged fund.鈥?It promised the Shangri-la of investment strategies: profit without risk. Using a metric he called 鈥渧elocity鈥濃€攁 precursor to what is now called beta, the measure of how closely a stock鈥檚 movement tracks the broader market鈥攈e split his holdings into two groups: good stocks that rose faster than the market in good times and fell slower than the market in bad times, and bad stocks that did the opposite. He took long positions in the former and short positions in the latter, theoretically ensuring that he鈥檇 make money whether the market went up or down.

Elegant as it was, it鈥檚 a difficult strategy to sustain. Who likes driving with one foot on the brake? When the market is humming and every jackass is cleaning up, it takes discipline to stay hedged and make less. But except for the occasional lapse, Jones apparently had it, eking out a dependable margin that, amplified with borrowed money, produced superior returns. His system demanded humility鈥攊t meant admitting that he couldn鈥檛 outsmart the market.

Jones was a private man with an intellectual bent. John Brooks, the author of The Go-Go Years, the definitive account of Wall Street in the sixties, depicts him as a folk hero who resisted the era鈥檚 hot-money schemes yet still emerged with a fortune.

A hedge fund is a fund that can take both long and short positions, use arbitrage, buy and sell undervalued securities, trade options or bonds, and invest in almost any opportunity in any market where it foresees impressive gains at reduced risk.
Hedge fund strategies vary -- many hedge against downturns in the markets -- especially important today with volatility and anticipation of corrections in overheated stock markets.

The primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions.