• Hedge fund managers bet it all -- almost every day.business 2 image by Nathalie P from Fotolia.com
  
  Hedge fund managers are the new Hollywood heroes of Wall Street. They often have enough financial capital in their firms to purchase multiple small businesses, and yet also retain the flexibility of being non-institutionalized (e.g. the Federal Deposit Insurance Corporation and other federal banking programs and insurance programs have no bearing on them). Yet, with great flexibility and independence also comes great risks, and there are certain practices a hedge fund manager should stick with to avoid ever depleting the firm's capital.
  
  

High-Risk, High-Profit Investments

• Whereas individuals are typically advised to utilize low-risk, low-profit investment vehicles (e.g. index funds, certificates of deposit) to grow their capital, hedge funds cannot remain functional and competitive unless they go above and beyond the capacity of such investment tools. Thus, hedge funds are in competition with the market returns of average investment tools and therefore must consistently take on high-risk, high-reward investments. After all, why pay extra compensation for investment tools and strategies you can get for free? As difficult as it is, a hedge fund can never let up -- taking on very risky investments that provide massive financial returns is an expectation of the business.
  
  

Investment Balance

• Even within a hedge fund investment portfolio of high-risk investments, it is still possible to balance the portfolio in a way such that overall risk is minimized. According to investing expert James Montier, a portfolio of roughly 18-19 different investments provides enough defense against a massive loss in a single investment, while still offering the opportunity for substantial growth of the overall portfolio.
  
  Balance in type of investment is also extremely important. For example, the 18 to 19 different investments could be split into multiple investments types (e.g. stocks with "long" or "short" positions, and even a set of high-risk corporate bonds).
  
  

Have an Edge

• According to Sebastian Mallaby, author of "More Money than God: Hedge Funds and the Making of a New Elite," the core advantage of hedge funds since their inception has been that they took advantage of current techniques and then innovated on those techniques. For example, before the Internet digitized financial news and provided 24-hour coverage of financial stories and techniques, some hedge fund managers made massive revenues by just showing up extra early to receive the financial press when it first came out in the morning. In this way, these fund managers would have slightly better information on the trading floor before the rest of the market -- this information edge helped hundreds of millions of dollars accrue to the firms to which those managers belonged.
  
  The market-filling reason for the existence of hedge funds is that they correct inefficiencies in the market. Correcting those inefficiencies requires an ever-greater amount of intelligence and innovation. Thus, a hedge fund manager always needs an edge.