The term “hedge fund” is often used as a synonym for “alternative investment fund”, meaning any investment fund that invests in non-traditional securities, or employs non-traditional investment strategies.
In the United States, when people refer to hedge funds, they are usually referring to investment companies that are organized under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940. Traditional mutual funds are subject to all sorts of restrictions which are meant to provide transparency and protect investors. Sections 3(c)(1) and Section 3(c)(7) provide exemptions from these requirements, for funds that are willing to limit their investor base (for example, by only accepting money from qualified investors).
Many people credit Alfred Winslow Jones with starting the first modern hedge fund in 1949, and coining the term “hedge fund” (though he originally referred to his fund as a “hedged fund”). Jones’s fund was what we would now call a long/short equity fund. For Jones, and for many people today, the defining feature of a hedge fund is that it hedges, that is that it has both long and short positions.
There are many different types of hedge fund strategies. These include, but are not limited to: commodity trading advisors (CTA), event driven, fixed income relative value, global macro, long/short equity, merger arbitrage, multi strategy, and quant arb.