Hedge funds are a special class of speculator due to their high pay packages, high leverage, sophisticated computerized trading strategies and tremendous trading volume.

1. They are private investment funds open to limited qualified individuals
2. Comprise between 30-50% of all trading activities in all financial markets
3. Do not act as “hedges”, rather use leverage to increase returns
4. Not currently regulated

Since hedge funds are profit seeking entities, they are still speculators. However with their high pay packages, high leverage, sophisticated computerized trading strategies and tremendous trading volume, hedge funds are a special class of speculator.

A hedge fund is a private investment fund that charges a performance fee and is typically open to only a limited range of qualified investors. Hedge fund activity in the public securities markets has grown substantially as it constitutes approximately 30% of all U.S. fixed-income security transactions, over half of U.S. activity in derivatives with investment-grade ratings, 55% of the trading volume for
emerging-market bonds, as well as 30% of equity trades. Hedge Funds dominate certain specialty markets such as trading in derivatives with high-yield ratings, and distressed debt.

In the United States, in order for an investment fund to be exempt from direct regulation, it must be open to accredited investors only and only a limited number of investors can belong to it. While there is no legal definition of "hedge fund" under U.S. securities laws and regulations, typically they include any investment fund that, because of an exemption from the types of regulation that otherwise apply to mutual funds, brokerage firms or investment advisors, can invest in more complex and riskier investments than a public fund might.

As their name implies, hedge funds often seek to offset potential losses in the principal markets they invest in by hedging their investments using a variety of methods, most notably short selling. However, in many cases, the term "hedge fund" now refers to many funds that do not actually hedge their investments; rather, many hedge funds using short selling and other "hedging" methods to increase risk, and therefore return, rather than reduce it.

Being outside the regulatory regime that applies to retail funds greatly reduces the information a hedge fund is legally required to make public. Additionally, divulging trading methods and positions would compromise the business interests of many types of hedge fund, tending to limit the information they want to release.

The assets under management of a hedge fund can run into many billions of dollars, and this will usually be multiplied by leverage. Their sway over markets, whether they succeed or fail, is therefore potentially substantial and there is a continuing debate over whether they should be more thoroughly regulated.

Diagram: Primary Dealer - Brokers for OTC

Advanced Topic: CFTC-Senate hearings on Hedge Fund Regulation