• This article answers what  hedge funds do and the core strategies they use to generate returns across different market conditions.
• Professionals, asset managers, and investors seeking to better understand hedge fund structures and strategy types will benefit from this overview.
• FlexFunds provides efficient securitization solutions that help structure and distribute hedge fund strategies globally. Learn more or request guidance by contacting us today.

Hedge funds began in the mid-20th century and remain one of the most recognizable investment vehicles among accredited investors for their ability to find market inefficiencies and seek returns in both rising and falling markets.

The concept of the hedge fund traces back to Australian sociologist Alfred Winslow Jones, who, while researching for Fortune magazine in 1949, created an investment strategy to manage long-term risk while taking advantage of shifting market conditions. 

To do this, Jones took short positions in overvalued securities expected decline and balanced them with long positions in undervalued stocks expected  to rise. Understanding what  hedge funds do, this is the same model that still defines their function today.

Jones also pioneered the use of leverage to expand his positions and introduced the incentive fee structure, taking 20% of profits as compensation. These innovations set the foundation for modern hedge funds, which have evolved alongside changing regulations and economic cycles.

According to Preqin, hedge funds now manage nearly $4.9 trillion globally, underscoring their enduring influence and flexibility across the world’s markets.

Main Objectives of Hedge Funds

Hedge funds are built with a clear purpose to generate positive risk-adjusted returns regardless of broader market direction. Moreover, while each fund has its own mandate, most share core objectives that set them apart from traditional investment vehicles. 

As a result, their flexibility, lighter regulatory constraints, and sophisticated tools enable them to pursue performance even during periods of volatility. 

Decorrelation from Traditional Markets and Active Risk Management

One of the key goals of hedge funds is to reduce correlation with traditional asset classes such as equities and bonds. 

In fact, when considering what  hedge funds do, diversification alone is not enough; these funds also aim to smooth returns through active risk management, using tools like derivatives, leverage, dynamic hedging, and exposure adjustments across regions and sectors.

How Do Hedge Funds Operate Today?

Currently, hedge funds manage enormous amounts of capital. In Q1 2024, global hedge fund assets climbed to approximately $4.30 trillion, but by the end of 2024, the industry expanded further to about $4.51 trillion. This marks nearly a 10% annual growth, according to recent reports from HFR. Furthermore, by Q3 2025, hedge fund capital reached a record $4.98 trillion.

This steady growth occurred despite persistent risks in the banking system, geopolitical tensions, and ongoing inflation, all of which continue to shape investor demand for actively managed, flexible investment vehicles.

But exactly what do hedge funds do, and how do they pursue their financial goals?

At their core, hedge funds aim to generate absolute returns, taking advantage of market inefficiencies across asset classes. 

Essential characteristics include:

• Flexible investment management and strategies
• Access to accredited investors
• Using leverage and derivatives
• Generally, high management fees
• Less regulation and oversight compared to traditional investment funds

How Do Hedge Funds Pursue Their Goals?

To achieve their objectives, hedge funds rely on research-driven strategies that help them through different market conditions, manage risk, and capture opportunities in both rising and falling markets.

To exploit market inefficiencies, hedge funds employ various strategies across stocks, bonds, derivatives, currencies, and commodities. 

Professionals consistently highlight four cornerstone approaches:

Long/Short Strategies

The long/short strategy is an investment approach used by hedge funds, in which managers buy assets they expect to appreciate (long positions) and sell assets they expect to drop in value (short positions). 

By pairing these long and short positions, the strategy aims to profit from both rising and falling markets while reducing overall risk.​

This method allows managers to hedge against market declines, because any losses from long positions can be offset by gains from short positions if markets fall. 

Event-Driven Strategies

Event-driven funds profit from price movements triggered by corporate actions, such as mergers, restructurings, bankruptcies, spin-offs, or regulatory outcomes. 

Macro Strategies

Macro funds take positions based on broad economic forces like interest rates, inflation, monetary policy, and geopolitical developments. 

Relative-Value Arbitrage Strategies

Relative-value arbitrage targets temporary mispricing between correlated assets, including fixed-income spreads, convertible bonds, statistical equity patterns, or discrepancies in dual-listed securities. 

FlexFunds supports managers by enabling cost-efficient securitization through solutions like FlexFeeder, expanding access to international investors and private banking networks.

Through modern securitization solutions such as FlexFeeder, hedge fund strategies can be repackaged efficiently and distributed worldwide, broadening access to new investor bases.

If you would like to learn more about how FlexFunds can help structure or distribute your hedge fund strategy, contact us.

Sources:

• https://www.preqin.com/insights/global-reports/2025-hedge-funds
• https://www.hfr.com/media/market-commentary/global-hedge-fund-industry-capital-surges-nears-historic-5-trillion-milestone/
• https://www.morganstanley.com/im/en-us/individual-investor/insights/articles/long-short-equity-strategies-hedging-your-bets4.html