Hedge fund managers use investment pools to implement various strategies and often invest in highly speculative investments because they have a small, qualified and sophisticated investor base.

For example, hedge funds can follow the long only approach that traditional asset managers use and can also be ‘short’ in the market by making use of a number of speculative techniques.

Being short in the market means hedge funds can potentially profit from assets that fall in value. In this way, hedge fund managers can use individual long and short positions to create combined long and short strategies.

In fact the first known example of a hedge fund was one set up by Alfred Jones in 1949 who founded a fund that bought stocks that he thought were undervalued and sold short stocks he thought were overvalued – a classic long and short hedge fund strategy.

Alternative investment managers include hedge fund managers, which have largely been unregulated to date. Due to the lack of regulatory protection, the typical investor group has been restricted to a small number of high net worth individuals or institutions who fulfil the criteria of ‘sophisticated investor’.