Hedge funds are privately offered, professionally managed investment vehicles that seek, like all financial investments, a positive annual return, limited variations in value, and the preservation of capital. HedgeFundFacts reports that “hedge funds play a critical role in the financial markets, broadening the use of investment strategies, increasing the number of participating investors, and enlarging the pools of capital available.” Hedge funds are considered an “alternative investment” vehicle. The term “alternative investment” is the general term under which unregulated funds operate, and the category includes private equity and real estate. Mainstream funds are investment funds that everyday investors can purchase; mutual funds are the prime example of a mainstream fund. Institutions and individuals that want to invest in hedge funds must have a minimum level of income or assets. Individuals need investments in excess of $5 million; or net worth of at least $1 million; or income of at least $200,000 in the last two years. Institutions must have total assets of at least $5 million or no less than $25 million in investments or investable assets.

Some of the basic investing strategies utilized by modern hedge funds have been in use for thousands of years. The ancient Greek philosopher Aristotle told a story of another philosopher, Thales of Miletus, who came to the conclusion that there would be a bumper crop of olives. According to the Internet Encyclopedia of Philosophy, Thales “raised the money to put a deposit on the olive presses of Miletus and Chios, so that when the harvest was ready, he was able to let them out at a rate which brought him considerable profit.” Thus Thales profited by using a contrarian trading strategy in which assets are purchased or utilized when they are performing poorly and then sold when they perform well.

The hedge fund sector as we know it today began in 1949 when Alfred Winslow Jones, a journalist and sociologist,...