Hedge funds are investment vehicles that explicitly pursue absolute returns on their underlying investments within the financial markets (stocks, bonds, commodities, currencies, derivatives, etc) and/or applying non-traditional portfolio management techniques including, but not restricted to, shorting, leveraging, arbitrage, swaps, etc. Hedge funds can invest in any number of strategies and they are perhaps most readily identifiable by their structure; typically a limited partnership (the manager acting as the general partner and investors acting as the limited partners) – although in Australia the trust structure is common - with performance related fees, high minimum investment requirements, restrictions on types of investor and entry and exit periods. 

To “hedge” means to manage risk. Any given money manager may make an allocation/investment; if this same manager simultaneously makes an allocation to an allocation/investment specifically designed to balance or counter-act any negative performance from his position then this would be his hedging position.