Why are hedge funds called hedge funds?
Hedge funds are called hedge funds because they are alternative investments that offer a way for investors to hedge their bets in other markets.
Since hedge funds can short, buy put options, and use leverage, they expose the investor to potential profits that can be realized in a bearish market. These profits can mitigate losses that the investor may experience in a market downturn.
They are called hedge funds because many of them hedge their investments by going long in some markets and short in others.
For example, a hedge fund can buy Apple stock and short Microsoft stock. Funds would do something like this if they believe Apple stock is undervalued compared to Microsoft. If the tech sector booms, the fund makes money from its Apple shares and loses from its short on Microsoft. The reverse would happen if the tech sector crashes.
Thus the hedge fund has hedged its investment in AAPL by taking the reverse position in MSFT. The actual money the fund makes depends on how much shares were bought or shorted.