What are hedge funds?

What are the value propositions of Hedge Funds? Who is buying into them and why? How do they compare to what Modern Portfolio Theory, The Efficient Frontier, Low Cost Index Funds and the Permanent Portfolio has to offer?

• Are Hedge Funds a hard or an easy sell? How they are sold? You can't see the prospectus online. I know something about http://en.wikipedia.org/wiki/Modern_Portfolio_Theory#The_efficient_frontier_with_no_risk-free_asset and the efficient frontier, http://en.wikipedia.org/wiki/Index_fund#Low_costss and the http://joshkaufman.net/permanent-portfolio/. (See also: http://dealbook.nytimes.com/2013/11/11/one-answer-to-the-index-fund-build-a-better-index/?_r=0) I have to say I might still not get hedge funds. I know in the US you have to be a high net worth individual, so called http://www.investopedia.com/terms/a/accreditedinvestor.asp; the assumption I guess if you earned your money the hard way you are free to part it more easily. I am not sure about the regulations in Europe and elsewhere but it is more lenient than in the US for sure.

• Answer:

  Hedge funds, by nature, are to provide absolute returns. Whether the market is up or down, hedge funds should always be up. Some notable hedge funds such as George Soross quantum fund returned over 30% for 30 years. Goldman sach also had tremendous returns. Hedge funds are known for using many more trading instruments such as derivatives and short selling to generate higher returns and beating the market.