Quora Answer: Why Would Someone Invest in Hedge Funds Considering Their Negative Reputation?

The following is my answer to a Quora question: “Why would someone invest in hedge funds considering their negative reputation?” 

People who understand finance do not have a negative impression of hedge funds.  A hedge fund is a type of actively managed investment pool.  In this case, they fund managers are known to utilise a variety of strategies and leverage, trading a variety of assets and their derivatives, with the sole intent of beating the average investment returns of the index.  In effect, because hedge funds end up competing against each other, they have to offer significantly high returns over and extended period to get those clients. 

The nature of hedge funds is high risk, commensurate with the high returns they work for,  Just as the gains are multiplied due to leveraging, so are the losses.  As such, hedge funds are vehicles for accredited investors with a high risk tolerance and high tolerance for potential loss.  They are not meant for retail investors.  Hedge funds tend to make the news when there is a spectacular loss, or collapse due to the leverage.  When they make money the rest of the time, it is not newsworthy.  This could be the impression of people who are neither in finance, nor accredited investors.