Alfred Winslow Jones came up with the concept of hedge funds in 1949. His strategy was simple: buy undervalued stocks while simultaneously selling overvalued stocks. That way, even if the entire market drops, you're hedged! Today there are many flavours of hedge funds, but for the most part, they seek to "hedge" for atleast some of the possible risks inherent in investing.
Some Differences Between Hedge Funds and Mutual Funds
Because many hedge funds "hedge out" market risks, they are often judged by their absolute returns, while the mutual funds are judged against an index. Hedge fund managers also tend to have substantial investments in their own funds as compared to mutual funds, which lends itself to an alignment of interests between investors and the managers of their money. The fee structure also tends to be different, with hedge funds tending to reward their managers on largely performance-based metrics, rather than simply on assets under management, which is common for mutual funds.
To hedge or not to hedge? As an investor, it will depend on your individual preferences.