Hedge funds can make big losses

When you invest in a hedge fund, you are giving money to a fund manager to speculate for you. The fund can speculate in any type of assets - shares, currencies, commodities. They can borrow money, i.e. leverage, to speculate in bigger stakes. The fund manager can make a lot of profit, but can also make a humongous loss. The hedge fund charge high fees, usually 3% or more of the invested assets, and can also take a large part of the profit, e.g. 20% of the gains. But, when the hedge fund loses big on the bets, they do not compensate the investors for the losses. Hedge funds managers can be multi-millionaires.

It can be reckless for trustees of trust funds or corporate funds to invest their money in hedge funds. But many of them do. This is why hedge funds are so successful. Here is a story of a hedge fund that performed badly this year.