It is hard to estimate just how many hedge funds there are, typically hedge funds are started by traders leaving their bank or broker employer to start their own business. I has been estimated that there are between 6,000 and 9,000 hedge funds in the world in 2002, managing $550 billion (US) in assets. About 35 of them are based in Australia.

What do these other funds do? In a nutshell, anything they like. Some are into trading exotic mathematical systems, options decay, position trading in futures, arbitrage... pretty much anything you can think of. An absolute returns manager is often totally unrestricted in their investment approach, they are true "anything goes" funds. A common criticism of hedge fund management is that the strategy is usually totally opaque to outsiders. This is sometimes true, but many managers opt to be as transparent as commercial reality allows, even if the strategy is too complex for any investor to understand it anyway.

Not every fund is unrestricted, many impose deliberate restrictions on themselves as far as gearing and concentration, in particular the ones with an eye on catching the lucrative superannuation market.

There are some hedge funds that are not all that different to most managed funds, but as the manager didn't want to submit to the occasionally very frustrating rules that govern funds on the size of positions they can take or minimum diversification they elected to call themselves a hedge fund instead. They might be a rather ordinary value manager for example, but with a focused portfolio and large positions in very small (perhaps unlisted) companies. This sort of thing isn't usually done by most normal funds and if you want to invest in such things you must be structured in a partnership or hedge fund structure of some sort.

Other hedge funds set out with a quantitative goal, and irrespective of returns seek out success in meeting that goal. Just as the measure of an index fund is how well it tracks an index, some of these other quantitative funds have goals such as replication of indexes, but in a different manner. For example a fund might have the goal to match the performance of the Nasdaq index in reverse, this is to say they will short sell every Nasdaq 100 stock to achieve returns exactly opposite what the NASDAQ did.

Macro investing is another type of hedge strategy. These are top-down strategic funds like George Soros' infamous Quantum fund. They forecast economies and take positions in currencies and indexes mainly. Leverage can be extreme and risk is high, but as Soros can attest the rewards can also be high, although he did in the end fall flat on his face, which should make many Asian demagogues happy.

Some hedge funds use many techniques, they employ a couple of dozen traders and a risk manager as foreman, and have each of them trading their account for profit. They may be enormously leveraged, using either vast amounts of borrowed money or accessing this leverage through generous margin requirements for professional futures traders.

Not all hedge funds use leverage, in fact there are many hedge funds out there that aren't leveraged at all, but nevertheless the whole idea of the very leveraged hedge fund seems to stick in people's minds and when most people think of a hedge fund they think of the Long Term Capital Management (LTCM) fund, which was run by a bunch of Nobel Prize winning geniuses, including the ones behind the Black-Scholes option pricing model, LTCM went really well for a year or two, making unprecedented profits, then Russia defaulted on its debts and the fund went down, losing an unprecedented amount of money.

Although LTCM is not typical of many hedge funds, it is probably the sort of thing that comes to mind for most people when they hear about these things. LTCM is the ultimate act of untruth in labeling, as they were basically a giant financial vacuum cleaner sucking up pennies from all over the world by finding mispriced options and arbitrage opportunities using a tricked up version of the Black-Scholes option pricing model (actually, nobody really knows for sure what LTCM was up to, the techniques are still a closely held secret). They were primarily engaged in very short term options trading and were about as different to a genuine long term buy and hold investor as it is possible to be.

Not every fund is this way, some are actually quite conservative and are really more like a traditional managed fund but using derivatives to reduce volatility. The latter class of hedge fund is actually becoming quite popular and outnumber the leveraged ones by a high margin. The popular media image of a hedge fund with all that leverage and computerised trading doesn't fit most hedge funds.